“Liquidity Management By Asset Managers”
4th Luxembourg Asset Management Summit
October 22, 2015
Russ Wermers
University of Maryland
and
Office of Financial Research, U.S. Treasury Department
http://wwwen.uni.lu/universite/actualites/evenements/
4th_luxembourg_asset_management_summit_21_23_october_2015_final_program
Caveat
•  My opinions expressed today do not necessarily
reflect those of the Office of Financial Research
(OFR), or the Financial Stability Oversight
Council (FSOC) in the United States.
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Motivation for this Discussion
•  A key focus since the crisis has been asset management liquidity
•  Driving this is the perception of these vehicles as “shadow banks”
AssetManagement
Sector
U.S.Size
Regulator(s)
($Trillions)
Ac:onsTakenor
Considered
Money-marketmutual
funds(MMMF)
2.7
SecuriFesandExchange
Commission(SEC)
2010and2014
AmendmentstoRule
2A-7
ETFs
2.5
SECandCFTC
None
Mutualfunds(nonMMMF)
15
SEC
2014Data
Enhancement;
2015Proposed
LiquidityRules
Hedgefunds
3
SEC
FormPF(Privately
filedwithSEC)
SeparateAccounts
15-20(?)
Managed:SEC
ReFrement:DeptofLabor
None
October 26, 2015
Liquidity Management by Asset Managers
Slide #3
Money Market Mutual Funds
Background on MMMFs
What are money market funds (MMMFs)?
•  Mutual funds that hold only high-quality, short-term, fixed-income securities.
(~fonds monetaires / fonds dynamiques)
•  Highly regulated but not insured
•  Additional reforms added in 2010
Types of MMMFs
•  Government and Prime
Types of Shareholders
•  Retail investors = you and me, our personal retirement savings (IRAs).
•  Institutional investors = nonfinancial and financial companies, company
retirement plans (401k), state and local govts, other mutual funds, non profits.
•  “hot money” = shareholders of MMMFs that move large amounts of money in
and out of MMMFs during both periods of calm and crisis.
•  Who? Economic reasoning suggests large-scale investors where traders have
incentives to maximize yield. For example, the cash desk of a large,
integrated financial institution such as Goldman-Sachs or JP Morgan
5
Despite yielding almost nothing, investors still
choose MMMFs to the tune of >$2.5 trillion
Money Market Fund Yields and Total Net Assets
Monthly, 2005-2011
Total net assets
($ trillions)
Net yield*
(percent)
5.0
4.5
4.5
4
4.0
3.5
3.5
3
3.0
2.5
2.5
2
2.0
1.5
1.5
1
1.0
0.5
0.5
0.0
0
2005
2006
2007
2008
2009
2010
2011
* Simple average of net yields on taxable money market funds.
Sources: Investment Company Institute and iMoneyNet
6
Why MMMFs can have a Liquidity Crisis
•  Money market funds have many bank-like features, but no explicit
protections of investor capital (e.g., FDIC insurance)
–  Virtually all US money market funds have fixed NAV of $1 per share
–  Risk of runs since portfolio market value can diverge from NAV
–  Structure resembles a demand deposit contract
•  Two (not mutually exclusive) mechanisms can lead to runs:
–  Deterioration in fundamentals / bad future returns
–  Externalities (payoff complementarities) induced by the behavior of other
investors. Runs become self-fulfilling prophesies
•  During the days following Lehman bankruptcy (Sep 15, 2008):
large-scale withdrawals from prime money market funds
October 26, 2015
Runs on Money Market Mutual
Funds
Slide #7
MMMFs & the 2008 Liquidity Crisis
–
–
9/15/2008: Lehman Brothers declared bankruptcy
9/16/2008: Reserve Primary Fund held 1% Lehman securities
•
–
–
Reserve allowed redemptions at $1 per share prior to 3 pm; closing 4 pm NAV = $0.97
per share.
9/17/2008: Other funds close or require support (Putnam, Wachovia).
9/19/2008: Treasury announces that it will guarantee certain money fund
assets
•
•
–
Sets up voluntary insurance program for money funds with a NAV of at least $0.995 as
of 9/19/2008
Insurance is triggered when NAV falls below $0.995
9/19/2008: Fed announced “The Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility”
•
–
Fed funding of banks buying asset-backed CP from money funds
October 7, 2008: Fed announced “The Commercial Paper Funding Facility”
•
–
Provide credit to a special purpose vehicle that would purchase three-month
commercial paper from U.S. issuers
October 21, 2008: the Federal Reserve announced “The Money Market
Investor Funding Facility”
•
Provide credit to a special purpose vehicle to purchase CDs, paper, etc., from MMMFs
8
Daily flow (%Daily
of previous
flow (%day
of TNA)
previous day TNA)
0.04
0.08
0.02
0.06
0
0.04
−0.02
0.02
−0.04
0
−0.06
−0.02
−0.08
−0.04
−0.1
−0.06
−0.12
09/01
−0.08
Panel A: Daily flows (% of previous day TNA) by category
Daily % Flows
Prime Institutional
Prime Retail
Govt Institutional
Govt Retail
09/08
09/15
09/22
09/29
10/06
Date in 2008
10/13
09/08
09/15
09/22
09/29
10/06
10/13
Dateflows
in 2008
Panel B: Cumulative
($ Bil) by category
−0.1
−0.12
09/01
10/20Prime Institutional
10/27
Prime Retail
Govt Institutional
Govt Retail
10/20
10/27
10/20
10/27
500
Cumulative flow
Cumulative
($ Bil) flow ($ Bil)
400
300
500
200
400
100
300
0
200
−100
100
−200
0
−300
−100
−400
−200
−500
09/01
−300
−400
October 26, 2015
Cumulative $ Flows
Panel B: Cumulative flows ($ Bil) by category
09/08
09/15
09/22
09/29
10/06
Date in 2008
Runs on Money Market Mutual
Funds
10/13
−500 Figure 1: Daily Flows to/from money fund categories in September-October 2008
Slide #9
0.05
Outflows were very heterogeneous
0
Quantiles of daily flows − Prime Institutional funds
Net flow (%)
−0.05
Net flow (%)
0.05
−0.05
0
−0.1
Daily % Flows for
Prime Institutional Funds
−0.15
−0.1
−0.2
09/01
−0.15
09/08
−0.2
09/01
0.04
0.03
09/08
09/15
09/15
09/22
09/29
Date
10/06
10/13
09/22
09/29
10/06
10/13
Quantiles of daily flows − Prime Retail funds
Date
10/20
Q10
Q50
Q90
10/27
Q10
Q50
Q90
10/20
10/27
Daily % Flows for
Prime Retail Funds
Net flow (%)
Net flow (%)
Quantiles of daily flows − Prime Retail funds
0.02
0.04
0.01
0.03
0
0.02
−0.01
0.01
−0.02
0
−0.03
−0.01
−0.04
−0.02
09/01
October
−0.03
26,09/08
2015
09/15
09/22
Runs
on Money
Market
Mutual10/20
09/29
10/06
10/13
Funds
Date
10/27
Quan:lesof
Cumula:ve
Fund-Level
Inst.Flows
9/15-9/19
Q1
-59%
Q5
-40%
Q10
-37%
Q25
-20%
Q50
-6%
Q90
+5%
Slide #10
What Did We Learn from 2008?
•  Prime MMMFs, as a sector, can have a liquidity
crisis
•  More money left on Tuesday, relative to Monday,
indicating:
–  Investors extrapolated troubles with Lehman
commercial paper to all financial commercial paper
–  Uncertainty about who held what contributed to a
run in a significant minority of Prime MMMFs
–  Management companies play key role in providing
implicit or explicit insurance for Prime MMMFs (so,
their depth of pockets and incentives are important!) 11
Schmidt, Timmermann, and Wermers (2015)
take a deeper look at the crisis week
•  Study Prime MMMF daily flows, for each share
class of each fund
•  Identification:
–  Each share class has the same pro-rata claims on
cash flows from assets
–  We can identify strategic behavior among different
investors (different share classes), while keeping
portfolio fundamentals constant
–  With many MMMFs having this structure, we can
independently vary fundamentals and investor type
12
Institutional investors in low expense ratio
shareclasses had larger redemptions
n
Evidence of a nonlinearity: extremely low EXPR shareclasses
had extremely large outflows, all else constant
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Runs on Money Market Mutual Funds
Slide #13
14
Quantile Regression Results
15
2010 Reforms Detail
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2008 Crisis and Resulting Reforms
Key 2010 Reforms
1.  liquidity provisions (reduced credit and interest rate risk)
2.  “know your investor” rules (prepared for redemptions)
3.  transparency (increase oversight and scrutiny of their portfolios)
4.  orderly closing process (reduce incentive to run)
5.  reducing the amount of lower-rated commercial paper
(reduced credit and interest rate risk)
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MMMFs & Summer of 2011
Taxable Money Market Fund Flows
Sum of rolling 5-business day change in assets, $ billions
Total
Prime
Government
188
37
-56
-59
-61
-369
(Sep 19, 2008)
U.S. Debt Ceiling
(August 1, 2011)
(June 30, 2011)
4 8 10 12 16 18 22 24 26 30 2 6 8 10 15 2 6 8 10 14 16 20 22 24 28 30 5 7 11 13 15 19 21 25 27 29 2 4 8 10 12 16 18 22 24 26 30 1 6 8
Sep
Oct
2008
Jun
Aug
Jul
2011
Source: iMoneyNet
18
Gallagher, Schmidt, Timmermann, and Wermers (2015)
are first to examine actual investor “types”
in a “bank-run” scenario
•  In Schmidt, Timmermann, and Wermers (2015),
investor “types” are assumed homogeneous
within a given share class
–  Lower expense share classes are found to be more
likely to exhibit run behavior during the crisis
•  GSTW (2015) use a unique database that
identifies, at a more granular level, investor types
19
Money Fund Data Source #1
–  Extensive panel dataset (iMoneyNet) of the vast majority
of US money market mutual funds
–  Daily total net assets (TNA) of individual share classes
•  Money funds that predominantly cater to institutional
investors
•  Money funds that predominantly cater to retail investors
–  Some holdings statistics:
•  % Maturing within 7 days
•  % Treasury
•  % Commercial paper
•  Weighted average maturity
–  Multiple share classes per fund
Money Fund Data Source #2
–  Portfolio holdings data (monthly) from Form N-MFP
•
•
Detailed data on issuer and security type (commercial paper,
repo, Treasury, CD)
Available since November 2010
Money Fund Data Source #3
–  Unique additional database from the Investment
Company Institute (collected from its members)
•
Year-end shareholdings from different types of investors
within each MMMF shareclass:
–
–
–
–
–
–
–
–
Corporations, non-financial
Corporations, financial
Retirement accounts
Nonprofit accounts
Fiduciary accounts
State and local governments
Retail brokerage-directed accounts
Retail individual-directed accounts
Some Results of GSTW (2015)
23
Ownership of All Prime Funds
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Distribution of True Institutional Ownership
Across Prime Funds (Year-end 2013)
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Table 9
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Flows are a Non-Linear Function of
True Institutional Ownership
Control variables: gross yield, port. liquidity, WAM, TNA, minimum investment
27
Certain Institutions are Most Likely to Run
Control variables: gross yield, port. liquidity, WAM, TNA, minimum investment
28
Retail Investors Don’t Run (or, Even “Walk”)!
Control variables: gross yield, port. liquidity, WAM, TNA, minimum investment
29
Effect of IO on Portfolio Holdings
Interpretation: Q5 spends more time in Repo—reaching for yield, and in Banks
30
Non-MMMF Mutual Funds
(e.g., equity funds, debt funds,
liquid-alt funds)
Funding Liquidity
•  Several papers, e.g., Sirri and Tufano (1998) find
that retail investors exhibit a convex flowperformance relation (chase winners, do not
disinvest from losers)
•  Del Guercio and Tkac (2000) find that
institutions exhibit a more linear flowperformance relation
•  Overall, analogous to what we find in MMMFs
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Asset Liquidity
•  SEC found that funds sell most liquid assets upon
redemptions, not a strip of everything
•  Equity funds—no worries (so far)
•  Bond funds--???—could be a problem if massive
outflows follow rate hikes
–  Empirical evidence: Goldstein, Jiang, and Ng (2015) paper
on flows in corporate bond funds
–  Finds that bond funds exhibit a concave flow-performance
relation, and more concave when more institutions own the
fund
•  Liquid alt mutual funds: anybody’s guess, but, so far,
this segment is small
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New SEC Proposals
•  1. Investment Company Reporting
Modernization (Implemented)
Monthly holdings disclosure (without delay
to SEC)
Monthly risk metrics to SEC
•  2. Liquidity Management Rules (Proposed)
–  Assessment of %-age of portfolio in each liquidity
bucket (e.g., 1-day liquidity, 2-3 days, 4-7 days)
–  Swing pricing
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ETFs
•  ETFs represent 25-40% of total market volume
in the U.S. !!! (Great reference: CFA
monograph on ETFs published online about a
month ago, authored by Joanne Hill of
ProShares)
•  Growing concern that speculative (noise) trading
in ETFs is creating liquidity problems in the
underlying cash securities
•  Massouwi, et al. (2015) find cross-sectional
relation between volatility of daily returns and
institutional ownership
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•  Wermers and Xue (2015) are examining intraday
impulse-response functions, a la Hasbrouck
(2003)
–  Response of cash index prices when high noise
trader buying in ETF, vs. informed trader buying in
ETF
•  Results:
–  1. When noise traders heavily purchase ETF, there is
a temporary price dislocation of cash index (~1
minute)
–  2. When informed traders heavily purchase ETF,
there is a more permanent price impact (at least 10
minutes, and maybe more)
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Hedge Funds
Extracts from Form PF
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Extracts from Form PF
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Hedge Fund Liquidity
•  OFR researchers are studying the relationship between investor
share liquidity and portfolio liquidity in private funds, using
Form PF
•  Early empirical results suggest that portfolio liquidity and
investor liquidity are strongly correlated across funds. This
suggests that funds specialize in strategies with different liquidity
profiles and investors select funds based on their anticipated
liquidity needs. In such models, funds that expect to trade more
heavily in less liquid assets impose tighter share restrictions on
their investors
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Some Lessons Learned
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A Model of Investor Behavior
​𝑓𝑙𝑜𝑤↓1,𝑡 =𝑓(​𝐸[𝑓𝑢𝑛𝑑𝑙𝑖𝑞↓𝑡+1 ],​𝐸[𝑎𝑠𝑠𝑒𝑡𝑙𝑖𝑞↓𝑡
+1 ])
​𝑓𝑙𝑜𝑤↓2,𝑡 =𝑔(​𝐸[𝑓𝑢𝑛𝑑𝑙𝑖𝑞↓𝑡+1 ],​𝐸[𝑎𝑠𝑠𝑒𝑡𝑙𝑖𝑞↓𝑡
+1 ])
​𝑓𝑢𝑛𝑑𝑙𝑖𝑞↓𝑡+1 =ℎ(​​
𝑓𝑢𝑛𝑑𝑙𝑖𝑞↓𝑡 ,𝑓𝑙𝑜𝑤↓1,𝑡 ,𝑓𝑙𝑜𝑤↓2,𝑡 )
​𝑤ℎ𝑒𝑟𝑒 𝑓𝑢𝑛𝑑𝑙𝑖𝑞=𝑓𝑢𝑛𝑑𝑖𝑛𝑔 𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦↓ 𝑎𝑛𝑑 𝑎𝑠𝑠𝑒𝑡𝑙𝑖𝑞=𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠 𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦
So, these relationships are interconnected, and
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Goals of Liquidity-Based Regulations
•  The goal of any liquidity-based regulation should be to
make it easy for all investors to determine a fund’s
liquidity each day, but to make it hard for some
investors to have advantageous information and/or
higher attentiveness; alternatively, to impose a timevarying redemption cost that takes away any “firstmover” advantage (e.g., swing pricing)
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But, Really!
•  However, this is too idealistic
•  Realistic constraints on funds and investors help
to reduce the potential for harmful “run-like”
behavior
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Regulations that Constrain Funds
Should Be Procyclical
•  Force increased liquidity during up-market
periods
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Regulations that Constrain Investors
Should Be Countercyclical
•  Redemption fees should increase in downmarkets
•  Redemption gating should be possible in downmarkets
•  Swing-pricing should be more severe in downmarkets
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Where is Research Needed?
•  MMMFs: Effect of new regime, starting Oct
2016, on liquidity and potential for investor runs
•  Mutual Funds: Effect of new monthly
disclosure, new liquidity rules
•  ETFs: effect of growing scale and scope on
cash securities markets
•  Hedge Funds: New Form PF data (but, must
spend significant visit at SEC or OFR)
•  Separate Accounts: Made possible by new
disclosure rules
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Conclusions
•  Many changes in the MMMF landscape
–  2008 MMMF crisis, 2010 Amendments to Rule 2A-7, 2011
Eurozone and Debt-Ceiling crises, 2014 Amendments to Rule
2A-7
–  Liquidity seems to have improved, but no big crisis to stress
test
•  Mutual funds, especially bond funds and “liquid alts,”
present liquidity risks in a stress event
•  Hedge funds
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Conclusions (continued)
•  Truly exciting and opportune time to study asset
management issues, especially liquidity and systemic
risks
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