By Bill Kelly, CEO, CAIA Association
The CAIA Association has partnered with AIMA to develop a series of educational papers designed to equip trustees and other fiduciaries with the proper tools to assist them in their risk oversight responsibilities. The third installment covered the use and deployment of leverage in alternative funds and we are now putting the finishing touches on the latest piece, which examines the art and science of liquidity.
The upcoming paper, appropriately titled Efficient Flows, will take a closer look at liquidity. We are at a very interesting inflection point in our capital markets and this subject matter is both timely and topical. We are now a full decade beyond the liquidity crisis that was the fuel to ignite the GFC and a lot has happened in those 10 years. Of note, our friendly and very accommodating central bankers turned on the liquidity hose and pointed it directly at the capital markets to the tune of $20 trillion. Asset prices across the board have reaped the benefits and the deployment of leverage via access to very cheap financing has certainly been an incremental source of octane–but how will this end?
Regulators in some markets have looked for prescriptive ways to measure and disclose liquidity, and in periods of tranquility, that mostly works. Times of stress are quite a different story and it is here that liquidity measurement is more of an art than it is science. Anticipation and preparation are essential for all fiduciaries because there are seasons to our capital markets and perhaps the halcyon days that we have enjoyed for so long are beginning to wane.
This new paper will examine four facets of liquidity and how to think about them across various hedge fund strategies. It is important to approach liquidity in the context of your goals and those of the other LPs investing beside you. Hedge fund managers quite often provide for the use of gates, side-pockets, or other restrictions to prevent the wholesale flight of capital at what might be the most inopportune times to seek liquidity.
Anyone who has tried to hail a taxi cab in London, Hong Kong or New York City in the height of an August downpour knows full well what an imbalance of supply and demand might look like. In this case, urgency will yield a soaking wet suit and a very uncomfortable remainder of the day. The more patient participants will find the less traveled side street or perhaps simply wait for the sun to come back out again.
Education is a powerful elixir for periods of market stress and our own well-intentioned, but sometimes poorly timed instincts. “Efficient Flows” will be the latest dose and we are proud to be in the information-dispensing business with our partners at AIMA. We look forward to sharing this with all of you later this month.