State Street Corporation in partnership with the Alternative Investment Management Association (AIMA), the global representative of alternative investment managers, released a new research report that found that nearly half (48 percent) of survey respondents say that decreased market liquidity is a secular shift that is here to stay. 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.
More than three-fifths of the survey respondents say current market liquidity conditions have impacted their investment management strategy, with nearly a third rating this impact as significant, and are reassessing how they manage risk in their investment portfolios. More broadly, they are adjusting to an environment of less liquidity in which trading roles have been transformed, new market entrants are emerging, and electronic platforms and peer-to-peer lending are changing the way firms transact their business.
“Increased regulation and the pressure to manage costs have significantly changed market liquidity conditions,” says Lou Maiuri, executive vice president and head of State Street’s Global Exchange and Global Markets businesses. “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.”
While there is no one-size-fits all strategy for balancing risk and return in the current market environment, investors and managers are adapting to the new environment by focusing their efforts in three areas:
- Rationalizing the risk
- Optimizing the portfolio
- New rules, new tools
49% say the role of non-bank institutions as liquidity providers will grow and 42% say that this growth will come from hedge funds
Nearly half (47%) say hedge funds may play an important role in providing liquidity in more volatile markets. “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,” continued Maiuri.
“Hedge funds and other asset managers are responding to more challenging market liquidity conditions by increasingly seeking out new opportunities, including taking on a more prominent role as market-makers, providing new sources of finance to the real economy, and lending their support and expertise to improving liquidity risk management,” added AIMA CEO Jack Inglis.