Liquidity crunch to change product market

More closed ended funds to come

By Darin Tyson-Chan
Wed 28 May 2008

An increase in closed ended funds could be the result of the current world liquidity shortage.

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The recent global credit crunch is likely to have a lasting effect on product manufacturers in terms of inherent protection features, according to the chief investment officer of a large funds management firm.

"When markets are functioning normally there's a lot of liquidity...and products were engineered to pass that liquidity through to the investor. As we've realised market liquidity can be quite illusionary at times and [this means] product features will come into the landscape going forward," ING Investment Management chief investment officer asset strategies and alternatives James Wright said.

"Hedge funds for a long period of time have had closed end funds or lock-up periods and I think that might be a feature of the landscape going forward as the industry as a whole starts to think about the way it sells liquidity to retail investors," he said.

Wright also believes there will be increased pressure on fund managers to use mark-to-market valuations on an ongoing basis to price their existing underlying assets.

The main asset classes needing to revise their practices are infrastructure and private equity according to Wright, which traditionally still use historical values to price underlying assets.

"That's great as long as all of the investors stay fully invested but if you start to get people leaving those funds and they have to crystallise those assets, quickly they'll have to start adjusting the NAV (net asset value) of some of those portfolios," he said.

Asset consultants and retail research houses in the industry are already starting to identify funds not employing mark-to-market valuations, Wright said.

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