The Global Risks Alliance (GRA)
An open-ended fund promises to return investors' money at short notice while holding assets that may take days, weeks or months to sell without loss. In normal markets the mismatch is managed quietly; in stress, redemptions and forced sales can reinforce each other and spill into the markets the funds hold. This page sets out how liquidity mismatch develops, how funds and supervisors measure it, and the tools that allocate its cost.
Liquidity and redemption · Bond fund · Scenario: redemption shock
| Historic worst | 15 | 2.5 | None needed |
| Severe | 21 | 1.2 | Swing pricing |
| Extreme | 30 | 1.1 | Gate |
Fig.Liquidity stress test. Design wireframe with placeholder names and illustrative values, not a record or a live system.
Fund liquidity risk is the risk that an open-ended fund cannot meet redemptions without selling assets at a loss that harms remaining investors. In stress, redemptions and forced sales can reinforce each other, so supervisors expect liquidity management tools that pass the cost of trading to those who redeem.
Where a portfolio's assets sit, and how much of its value is most exposed. Hypothetical assets, not an assessment.
Liquidity mismatches and financial stability. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
When redeeming investors receive a price that does not reflect the cost of selling the assets, those who stay bear that cost. Investors who see this have a reason to redeem first, which can turn a modest outflow into a run.
Funds meeting redemptions sell the most liquid assets first or sell into thin markets. Prices fall, other holders mark down, and outflows from similar funds follow. The channel runs through common holdings.
Derivatives and repo bring collateral calls that must be met in cash within hours. A rapid move in rates or spreads can force sales of unrelated assets, as the UK liability-driven investment episode showed.
Swing pricing, anti-dilution levies, redemption gates, notice periods and redemptions in kind move the cost of liquidity onto redeeming investors or slow redemptions. Their availability and use differ by jurisdiction and fund.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Swing pricing | Adjusting a fund's price on days of large net flows so redeeming or subscribing investors bear trading costs. |
| First-mover advantage | The benefit of redeeming early before others' redemptions force costly sales. |
| Redemption gate | A limit on how much investors may redeem in a period. |
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Assets in each liquidity bucket | percent of net assets by bucket | monthly | Fund liquidity classification and regulatory reporting | REPORTED |
| Redemption coverage ratio | liquid assets over stressed redemptions, ratio | monthly | Fund liquidity stress tests | MODELLED |
| Net flows | percent of net assets per period | weekly or monthly | Fund flow statistics | OFFICIAL |
| Swing factor applied | basis points of net asset value | per dealing day | Fund disclosures | DECLARED |
| Liquidity management tools available | tools by fund | annual | Prospectuses and supervisory surveys | REPORTED |
| Gross and commitment leverage | percent of net asset value | quarterly | AIFMD and Form PF reporting | REPORTED |
| Bid-ask spread of portfolio holdings | basis points | daily | Market trade and quote data | OBSERVED |
| Weekly liquid assets of money market funds | percent of total assets | monthly | Form N-MFP and EU money market fund reporting | OFFICIAL |
The topic as a computational graph: named sources feed the methods, an evidence review gates the outputs, and the decisions stay with the authorities that hold them.
Fig. 02Nodes carry their type, two metric rows and a state; connectors show what feeds what; dashed frames name the owners; the timeline is the cadence. Design of the pipeline, not a record of a run.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| FSB and IOSCO policy on liquidity mismatch in open-ended funds | Revised recommendations and anti-dilution tool guidance for open-ended funds | Free to read, attribution |
| ESMA Trends, Risks and Vulnerabilities reports | EU fund flows, liquidity and leverage vulnerabilities | Free reuse, attribution |
| SEC Private Funds Statistics from Form PF | Aggregated private fund leverage, liquidity and financing | Public domain |
| SEC Money Market Fund Statistics from Form N-MFP | Money market fund holdings, liquidity and flows | Public domain |
| ICI weekly and monthly flow data | US mutual fund, exchange-traded fund and money market flows | Free to read, ICI terms |
| EFAMA Quarterly Statistical Release | European UCITS and AIF net sales by category | Free to read, EFAMA terms |
| FSB Global Monitoring Report on Non-Bank Financial Intermediation | Size, composition and vulnerabilities of non-bank finance | Free to read, attribution |
| Bank of England system-wide exploratory scenario publications | Interactions between banks and non-banks in a market-wide stress | Free reuse, attribution |
Asset Management Nexus prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Fund boards and UCITS and AIF management companies | Which liquidity management tools a fund should have, how they are calibrated and when to use them | Liquidity bucket profiles, redemption stress tests and tool calibration practice |
| Securities regulators | Whether a category of fund needs stricter liquidity classification, notice periods or tool requirements | Mismatch measures by category and flow behaviour in past stress episodes |
| Central banks and financial stability authorities | Whether fund outflows and margin calls could impair core markets | System-wide scenarios linking fund flows, leverage and dealer capacity |
| Pension trustees using leveraged liability hedging | What collateral buffer and recapitalisation process a hedging mandate needs | Margin-call scenarios under stressed rate moves, and the time needed to recapitalise |
When a fund faces redemptions, it must sell assets or use cash buffers. If the assets are illiquid, selling can lower prices, and the costs may fall on investors who remain. This creates a first-mover advantage: investors who redeem early may get better terms, which can encourage runs.
Market liquidity is procyclical. In calm markets, assets trade easily; in stress, dealers and other liquidity providers may withdraw, spreads widen and selling becomes costly. Several stress episodes in recent years showed how fund redemptions, margin calls and market illiquidity can reinforce each other.
Leverage adds pressure. Margin calls on derivatives or borrowing can force sales at the worst time.
Simulating redemptions and asset sales, using scenario design and stress testing. Behaviour in severe stress is uncertain.
Bid-ask spreads, price impact and trading volumes. These change rapidly in stress.
Studying how investors respond to performance and shocks, using econometrics.
Modelling fire-sale spillovers through common holdings, using financial and risk engineering.
Past stress episodes inform models but may not represent future ones, especially as market structures change.
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.