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View the article online at http://citywire.co.uk/wealth-manager/article/a737633

Supertanker funds: liquidity issues in shallow waters

by Jonathan Beckett on Mar 07, 2014 at 11:31

Imagine if two or more supertankers funds attempted to trade at the same time and in the same direction, then the issue becomes quickly exacerbated. It has already been reported that supersized high frequency trading funds have helped to create ‘flash crashes’ when they have come into contact with one another. This can happen rapidly and without warning and be exacerbated if there is a sudden rush of redemptions. If the fund manager is unable to cover all redemptions out of his/her ‘box’, the fund could struggle to find the necessary number of buyers at an optimum price.

These issues can and do lay dormant for months or even years so long as the market direction remains relatively straight-ahead. When markets become stressed and we see investor herding and asset rotations, then these issues can suddenly emerge. Large assets can provide economies of scale but can pose difficulties when navigating difficult markets.

The key question here is how effectively can a manager handle the capacity of this supertanker fund? As fund sizes grow, we should take liquidity management and capacity much more seriously before investing in such funds.

We must ask the simple questions: how diversified is the fund by geography of issue and asset class invested, how liquid are those positions, what is the maturity profile of those assets and what does the fund’s liquidity management look like?

If you find you are not fully comfortable with these questions – or the resulting answers – then pause before weighing anchor.

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