Liquidity risk management of equity funds

Subsequent to a recent review across asset management firms, the Financial Conduct Authority (FCA) has observed varying degrees of liquidity risk management standards across firms and has issued a warning to Authorised Fund Managers (AFMs) to better risk-manage their liquidity to avoid investor harm.

In this whitepaper, Mazars discusses standard liquidity metrics and the necessity to calibrate them appropriately to the fund risk-appetite. We discuss the importance of stress-testing for an effective liquidity risk management. We look into one of the most common liquidity tool used by fund managers: swing pricing. Finally, we corroborate FCA's observation that AFM display very different positions when it comes to liquidity risk management by comparing the liquidity risk of multiple funds following the same index benchmark.

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