Fund Directions - Six Options For Dealing With Liquidity Issues

Six Options For Dealing With Liquidity Issues

Kristin IvesFund Directions spoke with Kristin Ives, partner at Stradley Ronon in Philadelphia, about what boards should consider when faced with liquidity problems. "For boards it's good to know what the manager's plans are for dealing with a liquidity crunch," Ives said. "The board is not always in the best position to say what the best choice is but it should know what the options are."

Funds may face a liquidity problem when they need cash for their operations, such as redemptions. Such problems can be caused by many things, including changes in liquidity of a particular securities market segment in which the fund has invested, the inability to unwind derivatives transactions in the time expected and significant, unanticipated redemption requests. For example, there have been funds recently that were not invested in problematic debt securities but faced significant redemption requests and came across problems trying to sell off perfectly good debt in a tight market, Ives explained

The liquidity crunch can force funds to sell securities at prices below what the manager would expect under normal market conditions. Funds might also find that obtaining good, reliable pricing information and keeping an eye on the fund's limits on illiquid securities are difficult during a liquidity crunch. Boards should ask whether these problems highlight weaknesses in the fund's policies on monitoring liquidity, valuation or managing redemptions.

The following are six options funds have to help them when it comes to a liquidity crunch, although not every option is suitable or available for every fund and some need to be planned in ...

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Six Options For Dealing With Liquidity Issues