Fund managers and institutional investors are increasingly prioritising liquidity management in the face of increasing regulatory constraints, historically low interest rates and sluggish economic growth, according to a research report by State Street and Alternative Investment Management Association (AIMA).
Over three-fifths of the respondents said that existing market liquidity conditions affected their investment management strategy, while almost a third termed the impact as significant.
Further, 42% of respondents said that the new market environment is making it more challenging to report their liquidity position to their board or regulators.
Overall, 48% of the respondents held the view that decreased market liquidity is a secular shift that is here to stay.
In order to cope up in the existing scenario, 44% of respondents said that they intend to invest to improve their risk –reporting capabilities, while 53% of asset managers and asset owners said that they plan to add more liquid investments to maintain exposures.
Forty four percent of respondents said that they plan to increase the size of their cash allocation against future liabilities or redemptions.
Also, 49% of respondents believed that role of non-bank institutions as liquidity providers will increase in new market conditions, with 42% citing that the growth will be from hedge funds.
Forty seven percent of respondents said that hedge funds may play an important role in offer liquidity in volatile market conditions.
State Street Global Exchange and Global Markets businesses executive vice president and head Lou Maiuri said: “Increased regulation and the pressure to manage costs have significantly changed market liquidity conditions.
“The new liquidity paradigm is causing many players in the investment industry to think again about the fundamentals: what roles they play, where they invest, and how they transact their business.”