Liquidity Management Tools: New Rules For Open-Ended Alternative Investment Funds

Setting the scene

The risks attached to the liquidity profile of alternative investment funds (“AIFs”) – and how to mitigate them – have been in the focus of discussions on an international level over the last few years. In its yearly market reports, the European supervisor ESMA regularly mentioned these; the Financial Stability Board, the European Systemic Risk Board and IOSCO have also made it a topic in their own reporting. The main concern is that certain AIFs are open-ended and therefore give investors the possibility to redeem their units at a certain frequency, while the portfolio they invest in is fairly illiquid and cannot be sold in that timeframe. This so-called liquidity mismatch is identified as a risk from two perspectives: For investors because they cannot exit as they expect and resulting fire sales might drive down the value of the portfolio; for the public because a mass excodus of investors could cause a systemic risk for the markets, as 65% of all