Institutional investors globally believe decreased market liquidity is a secular shift that is here to stay and one which requires a new strategic approach, research from State Street and the Alternative Investment Management Association (AIMA), reveals.
Nearly half (49%) of the survey respondents believed the number of non-bank institutions acting as liquidity providers is set to grow.
Hedge funds were cited among these institutions with 47% of predicitng that hedge funds will play an important role in providing liquidity in more volatile markets.
Survey respondents were in agreement that current market liquidity conditions were impacting their investment management strategy, with nearly a third rating this impact as 'significant' and causing them to reassess how to manage risk in their investment portfolios.
In Asia Pacific region alone, more than 90% of the survey’s respondents said that market liquidity conditions had impacted their investment management strategy.
Commenting on the results, executive vice president and head of State Street’s Global Exchange and Global Markets businesses, 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.’
State Street said that regulations stemming from the 2008 financial crisis, coupled with historically low interest rates and slow rates of growth in the global economy, have constrained the ability of many banks to perform their traditional roles as market makers, which in turn has impacted broader market liquidity conditions.
Tackling the new normal
State Street, which manages around €2.24 trillion, said that investors and managers were adapting to the new environment by focusing their efforts in several areas.
‘With liquidity likely to remain top of mind for years to come, now is the time to find the strategies, tools, and solutions that will make a sustainable difference in the new investment climate,’ Lou Maiuri said.
When it comes to the risk rationalisation, 44% of respondents plan to invest to improve their risk –reporting capabilities whilst 42% say the changed market conditions are making it more challenging than before to report their liquidity position to their board or regulators.
Investors also optimise their portfolios. Over half (53%) of asset managers and asset owners are planning to add more liquid investments to maintain exposures and 44% are increasing the size of their cash allocation against future liabilities or redemptions.
The asset manager commissioned Longitude Research to conduct a global survey of 300 institutional asset owners and managers in June and July 2016. Of this number, 150 were asset owners, including pension funds, insurance companies and endowments and foundations, and 150 were asset managers. These included 50 hedge funds.
The respondents represented 14 countries worldwide. Approximately 35 percent of respondents were based in the Americas, 40 percent in Europe and 25 percent in Asia Pacific.