liquidity

Government bonds have long enjoyed a special place in investors’ portfolios. Often seen as a cornerstone of stability, their appeal as a safe haven is rarely questioned.

Luxembourg’s real estate investment sector has recovered strongly from the economic slowdowns caused by the ongoing global Covid-19 pandemic, according to figures released in the Association of the Luxembourg Fund industry’s (ALFI)  15th annual Luxembourg real estate investment funds survey. (Full version link below.) 

Liquidity in Luxembourg’s funds is a key concern for the CSSF, Luxembourg’s financial regulator. With all asset class crashing over the last month, investors have had no easy safe-haven options, and many have sought to sell up and hold cash. However, to date, this stress appears not to have led to the suspension of any Lux fund.

All of Luxembourg’s fund community is feeling the impact of the coronavirus crisis, and fund association Alfi is doing its best to offer support. At the same time however, Alfi itself is being hit by the crisis too, as part of its revenue stream partly drying up.

Alfi postponed its flagship European Asset Management Conference, due to take place on 17-18 March this year, to mid-September. There are another dozen or so events on its calendar for this year, some of  which may have to be cancelled depending on the coronavirus situation. 

European regulators are trying to prevent a liquidity crisis caused by excessive outflows from investment funds in the wake of the coronavirus crisis. The CSSF has joined other European regulators in asking asset managers for large amounts of information about their ability to repay investors.

French and German financial regulators are asking for daily updates on outflows from open-ended funds, while stock market watchdogs in Luxembourg and Ireland have also stepped up their oversight, the Financial Times reported on Monday.

ETFs have remained open for business during the coronacrisis, while credit markets were largely frozen. But ETFs were still able to cope with unprecedented outflows, providing investors with badly needed liquidity. However, this may just be a Pyrrhus victory for the index providers.

Credit markets have been hit hard across the board. ‘Exiting at normal prices is now virtually impossible because there is hardly any liquidity.’ Only ETFs can still be easily sold, resulting in dramatic price declines. Can the ECB’s latest support package restore calm?

ETFs can be a source of systemic risk because they can induce important feedback effects in markets, such as increased volatility in periods of market stress. However, these effects can be mitigated by regulators, according to a research paper by Maureen O’Hara (pictured) of Cornell University and assistent-professor Ayan Bhattacharya of the City University of New York.