oriented rising or falling markets volatility

In the phases of financial turbulence, managers are often a mattress of "cash". The reason As a precaution, they anticipate movements of withdrawal on the part of clients frightened by the turn that events. Moreover, studies confirm that more market volatility is progressing, more the likelihood that the funds suffer withdrawals. Investors make no distinction between the "good" and "bad" volatility, i.e. oriented rising or falling markets volatility. The two have a negative effect on flows to products invested in shares.

Before investing them on the market, managers tend to accumulate the cash they receive from their subscriptions for a longer period than in the past. They prefer to keep their "cash" where they would share repurchases to honour shortly after. A compensation strategy stream, source of savings for them. Overall, managers seem better manage that before their liquidity constraints, as particularly evidenced the reduction of the sensitivity of their transactions to the movements of input and output of clients. The cost of this provision of liquidity is even more important for a fund that its customers are volatile and difficult to predict. It is also the case when they represent a significant share of its assets and that they are concentrated in a short period.

Pay strategy

Rather than increase the share of its assets invested in coin of the realm, the Manager can increase that placed on liquid assets, because their pay is more interesting than that of the "cash" in times of high volatility. Normally, few liquid assets recorded superior performance to the titles that are much, but liquidity fall, when the opposite occurs. What are funds composed of liquid values are superior to the other returns. Example: 10 of the liquid funds have superior performance of 1.4 per month to 10 of less liquid funds. However, in the phases of abundant liquidity, the first record a lower performance of 0.8 compared to the latter.

The "flight to liquidity" in times of crisis is a pay strategy for asset managers. It also explains a seemingly paradoxical result: us mutual fund have a superior risk adjusted performance during contraction in activity of the economic cycle that found during periods of "boom". However, these phases of contraction in activity are also those where the liquidity of markets is the lowest and where managers prefer the more liquid securities. Thus, could best yields from managers during these periods be explained in part by the liquidity of their portfolios. This bias is particularly strong for collectives of modest size, the more vulnerable to unwanted movements of withdrawal.

The cost of liquidity

Transactions that a fund is forced to carry out subscriptions and redemptions important are transactions "incurred" and constraints, quite different from the operations of purchase and sale of securities solely motivated by questions of value or earnings growth... Work evaluated the performance of these two categories of transactions. Their conclusions "Forced" purchases induced by large subscriptions to a fund record stock performance lower than the market the difference in purchases of securities based only on the traditional financial analysis. Thus, burst disorderly and massive of "cash" in the Fund returns against the existing customers as a decrease in performance.

The same phenomenon, but more modest scale, was observed with sales operations. When the Manager must give securities on the basis of outputs important in its Fund, it can be also forced to sell shares that would, properly, wanted to keep longer, given their potential. Which, once again, decreased performance, but less than in the case of "forced purchases." Thus, the provision of a daily liquidity to clients funds has a true cost to the Manager, estimated by some work at 1.2 per year. Hence the interest to have clients varied in terms of horizon investment and sensitivity to market movements so that their movements of redemption and subscriptions to compensate. It is also necessary to know them. "A central part of our portfolio management process is to seek to understand liquidity to our clients needs and try to predict their cash flow," confirms Jason Singer, responsible for the international management of the monetary funds of Goldman Sachs Asset Management.