Fund managers should look at new ESMA liquidity guidance as an opportunity to understand their portfolios and more accurately disclose the risk of gating and redemptions within their portfolios.
Joseph Cordahi, product strategy director at international data management firm NeoXam, says it is clear that alternative fund managers will find meeting new ESMA requirements for liquidity stress tests easier than Ucits or MMF funds as they already face similar requirements.
MMF guidelines are quite clear now in terms of calculation methods to be applied.
Liquidity Stress-Test guidelines also imply that more data will need to be managed, as ESMA specifies the data set to be used.
Cordahi says the AIF managers are likely to be better equipped in terms of their systems. They are also more likely to currently incorporate and warn investors of redemption restrictions in prospectuses due to their more common specialist strategies.
He says: “AIF funds already need to produce some calculations, and already have to provide liquidity risks and liquidity buckets and consider which percentage of your fund could be redeemed in one week, one month and so on. It’s already something that a fund manager has to report if they are in the AIF side.”
He says the ESMA requirements, which come into force from next April for money market funds and require most funds to run a stress test four times a year will encourage fund managers to understand their portfolios much better.
He says that it is the requirement to test liabilities as well as assets that is key.
“The most important part, which is good to see from ESMA, is you have to do the stress test the liquidity on the liability side as well as the asset side. You need an understanding that if all your investors want to redeem the funds, in how many days could you do that. The liability part is very important,” he says.
He says the move by ESMA is understandable given the shift since the financial crisis out of relatively liquid bonds and equities into real estate, infrastructure, private equity and other illiquid assets.
“I can understand some of the concerns about costs, because if you have quite old IT systems, you’re not able to calculate this kind of risk very easily and cope with additional data. When you have to apply a stress test, it can be very complicated. It’s a cost and it’s time.”