Liquidity Management Top Priority for Fund Managers and Institutional Investors in New Market Environment

State Street Corporation (NYSE:STT) in partnership with the Alternative Investment Management Association (AIMA), the global representative of alternative investment managers, released a new research report today 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: The liquidity shift has serious ramifications for investors globally. They are seeking to develop the right strategies and tools to help them succeed in this complex new environment. This includes improving the way they measure and report on liquidity risk, and reassessing how they manage risk in their investment portfolios.
  • 42% of all respondents say the changed market conditions are making it more challenging than before to report their liquidity position to their board or regulators
  • 44% of respondents plan to invest to improve their risk –reporting capabilities.
• Optimizing the portfolio: Investors and managers are shifting their allocation strategies to take account of new liquidity conditions. While more liquid fund vehicles such as ETFs, UCITS funds and 40 Act funds have been gaining ground, a holistic strategy that balances risk with return across the whole portfolio is critical.
  • 53% of asset managers and asset owners are planning to add more liquid investments to maintain exposures
  • 44% are increasing the size of their cash allocation against future liabilities or redemptions
• New rules, new tools: The new market liquidity conditions are inspiring many players in the investment industry to invest in new solutions and platforms such as peer-to-peer lending that provide alternative sources of liquidity.
  • 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.

Click here to download a copy of State Street’s new research report: “Let’s Talk Liquidity: Opportunities in a New Market Environment.”

About the research
State Street commissioned Longitude Research to conduct a global survey of 300 institutional asset owners and managers in June and July 2016. Of this number, 150 were asset owners, including pension funds, insurance companies and endowments and foundations, and 150 were asset managers. These included 50 hedge funds.

In total, the respondents represented 14 countries worldwide. Approximately 35 percent of respondents were based in the Americas, 40 percent in Europe and 25 percent in Asia Pacific.

In addition to the survey, a range of in depth interviews were conducted with select leaders across the industry.

About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors, including investment servicing, investment management and investment research and trading. With $29 trillion in assets under custody and administration and $2 trillion* in assets under management as of September 30, 2016, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. For more information, visit State Street’s website at www.statestreet.com

* Assets under management were $2.4 trillion as of September 30, 2016. AUM reflects approx. $40 billion (as of September 30, 2016) with respect to which State Street Global Markets, LLC (SSGM) serves as marketing agent; SSGM and State Street Global Advisors are affiliated.

About AIMA
AIMA, the Alternative Investment Management Association, is the global representative of the alternative investment industry, with more than 1,700 corporate members in over 50 countries. AIMA works closely with its members to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes, and sound practice guides. AIMA's core objective is to provide leadership to the alternative investment industry, and to be its pre-eminent voice globally. AIMA's team engages proactively and constructively in shaping the financial markets reform debate, drawing upon the expertise and diversity of its membership. AIMA is closely aligned with and promotes the best interests of the alternative investment industry in order to enhance the wider understanding of its function. AIMA has cultivated positive and lasting relationships with regulatory, fiscal and governmental authorities around the world, whilst upholding engagement with the media in order to achieve a more accurate and informed tone of news. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). For further information, please visit AIMA’s website, www.aima.org.

Important Risk Information

Investing involves risk including the risk of loss or principal.

Hedge funds (or other alternative investment funds) are designed only for sophisticated investors who are able to bear the risk of the loss of their entire investment. An investment in a hedge fund should be viewed as illiquid and interests in hedge funds are generally not readily marketable and are generally not transferable. Investors should be prepared to bear the financial risks of an investment in a hedge fund for an indefinite period of time. An investment in a hedge fund is not intended to be a complete investment program, but rather is intended for investment as part of a diversified investment portfolio. Typically interests in a hedge fund are not registered under the US Securities Act of 1933, as amended (“the Securities Act”), and the fund is not registered as an investment company under the US Investment Company Act of 1940, as amended (the “Investment Company Act”), and as such, investors will not be afforded the protections of those laws and regulations. A prospective investor should carefully review all offering materials associated with a hedge fund, including the risk factors, and should consult his or her own legal counsel and/or financial advisor prior to considering an investment in a hedge fund.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. Brokerage commissions will reduce returns. Index-based ETFs are passively managed and seek to track an index of securities. Expenses may cause the ETF's returns to deviate from the returns of the index.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

©2016 State Street Corporation- All Rights Reserved

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Exp. Date: 11/30/17

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