Suggestions to improve the flexibility of investment funds

Suggestions to improve the flexibility of investment funds

In the article, the International Monetary Fund describes the role investment funds play in financial crises and international financial stability. The IMF proposes concrete measures to strengthen liquidity risk management tools to meet clients’ daily liquidity demands and mitigate the negative effects of liquidity tensions arising from the procyclical dynamics of massive asset sales.

The highlights of the article will be as follows:

  • Investment funds play a prominent role in the global economy and financial stability: Currently, about 50% of global financial assets are managed by non-bank institutions. Investment funds explain much of this growth and have become a key driver of corporate and individual prosperity, but they are also a source of cross-border risk transfer in times of crisis.
  • Liquidity Risk in Times of Crisis: The search for higher returns in a lower interest rate environment has led a portion of these funds to invest in assets with higher risk and lower liquidity (private debt or real estate assets). In times of adverse shocks (such as the pandemic crisis), customers demand liquidity, which means that funds are forced to sell at equilibrium prices, which leads to a downward spiral and an outflow of funds from companies and emerging countries, which jeopardizes liquidity and liabilities and amplifies the effects of the crisis.
  • The International Monetary Fund proposes various measures to protect global financial stability by increasing the flexibility of investment funds. for example:

– Discouraging the quick liquidation of fund shares, and penalizing sales in the first moments of the crisis in favor of the remaining investors, thus avoiding accidents of massive selling.

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Creating liquidity tools, such as increasing precautionary liquidity to counter cyclical fluctuations, limiting the sale of part of the position, or repaying with other liquid assets, such as Treasury bonds, instead of cash.

These measures can be applied sequentially or in combination, depending on the severity of the crisis.

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