Whataboutery (noun) – the technique or practice of responding to an accusation or difficult question by making a counteraccusation.

Fund liquidity has been one of the most scrutinized areas of asset management for several years now. The pandemic-fueled market events of 2020 have copper fastened fund liquidity management as one of the central tenets of global policymaker concerns. In recent months, global regulators have issued several regulatory releases on fund liquidity having had the opportunity to pick through the bones of the pandemic-fueled market volatility and its impact on global asset management. What is notable within this debate is regulators and the industry appear to be quite divergent in their view of recent history. Asset managers assert that funds navigated the choppy post-pandemic waters reasonably well. Backing up this assertion is the fact that despite some of the most challenging market conditions in years, there were no widespread fund suspensions or issues with liquidating portfolios in order to fund investor redemptions. 

New rules or recalibration of existing rules are rarely a reaction to those in compliance, they are usually an attempt to deal with sub-optimal events that typically represent the thin edge of the wedge. While the regulators themselves suggest that the funds’ ecosystem has proven resilient overall, they cannot ignore negative fund liquidity events such as instances such as Woodford, H2O, the UK daily dealing property funds problems. Even tangential events such as the recent furors around market events such as GameStop, Achegos, and Greensill all feed into the concerns that overall fund liquidity and systemic risk is on the rise and the regulatory compulsion to “do something" remains strong.

However, despite the self-satisfaction of the industry, regulators have clearly spelled out their concerns that funds remain a source of systemic vulnerability and that fund liquidity risk management must be made more robust to ensure funds are better equipped to meet future challenges. The point being made consistently by regulators weighing in on the issue is that funds did prove to be resilient throughout the market turmoil. They believe the resiliency was primarily due to the historic levels of support, intervention, and assistance provided by global governments and central banks through asset purchases and liquidity backstops, rather than merely the robustness of the fund liquidity frameworks. Without these external interventions, it is argued that the markets which funds operate in would have deteriorated rapidly, which in turn would have had a contagion effect on other parts of the financial system. The counter point is that fund liquidity would have been a lesser concern to the overall economic and societal impacts had no intervention occurred, and once more the events of March 2020 are very much the exception rather than the rule for funds.

Even the International Monetary Fund (IMF) had some words of warning for global asset managers last week about the “unintended consequences” to markets of the colossal governmental supports extended to deal with the economic effects of the pandemic in its recently published “Global Financial Stability Report”. The report asserts that while the extraordinary measures were warranted to ensure financial stability, possible consequences of the support packages extended include possible excessive risk taking and stretched valuations.  As such, the IMF urge global policymakers to “act swiftly to prevent financial vulnerabilities from becoming entrenched and turning into legacy problems.”

All seems to point to a continued focus on sources of future systemic risk. A continued sub-set of those concerns is the focus on fund liquidity of investment funds and the desire of regulators to ensure liquidity mismatches between portfolio assets and investors redemption expectations remain aligned and appropriately managed. Policymakers appear less concerned about how well funds have done to date, and more focused on the future and ensuring consideration of a number of “what if” scenarios. 

What if?

The most pertinent and repeated “what if” question regulators are posing asset managers, is what if governments and central banks are unable or not inclined to provide asset purchase programs or other backstop supports, then what? Would the global investment funds market remain viable as currently constituted?

Several policymakers have made the point recently that a presumption that government and central bank supports should not be assumed nor built in and guaranteed as markets shape their overall risk management models. The last two market crises, the great financial crisis of 2007/2008 and the COVID-19 pandemic have been addressed by titanic and unconventional governmental economic interventions, a policy best summed up best by Mario Draghi’s “Whatever it Takes” speech in 2012 when the Eurozone faced its darkest hour. However, regulators appear keen to reinforce that the point that an assumption of automatic external supports to investment portfolios cannot become a default component of liquidity or risk management for asset managers. The “what if” question remains valid and investment funds need to ensure they can stand on their own two feet going forward.

Global regulators are posing a series of “what if” hypothetical questions in speeches and publications having had time to assess the detailed 2020 market data. Asset managers will contend that they cannot manage funds for hypothetical scenarios and that many of the macro concerns expressed by regulators are completely out of the control of the asset managers. However, these are questions that are being posed and underpin much of the recent regulatory publications regarding fund liquidity.

Five “What If” Fund Liquidity Questions:

1. What if government market interventions were not extended to support asset values or liquidity?
2. What if asset valuation levels have decoupled from economic fundamentals and are not reflecting the true macroeconomic uncertainty?
3. What if investor redemptions are a lot higher in next stressed market than they were in March 2020?
4. What if continued growth in non-bank financial intermediation results in increased financial stability risks?
5. What if your investment portfolio liquidity and investor liquidity expectations are not aligned?

These are just some of the macro questions being posed of asset managers currently. Not unusually, the fund liquidity spotlight shines most intensely in Europe now, where ESMA and national regulators have been looking intently at the issue. Check back on the blog on Wednesday as we will focus on some of the specific fund liquidity measures particularly relating to E.U. Money Market Funds and a recent ESMA fund liquidity publication on UCITS following a widespread industry wide review.