Illiquid assets
Unwrapping alternative returns Global Investor, 01/2015 Credit Suisse
Unwrapping alternative returns
Global Investor, 01/2015
Credit Suisse
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GLOBAL INVESTOR 1.15 — 04<br />
THE ALLURE OF<br />
LIQUIDITY –<br />
CURSE OR BLESSING?<br />
TEXT MARKUS STIERLI Head of Fundamental Micro Themes Research<br />
ILLUSTRATION FRIDA BÜNZLI<br />
What do we know<br />
about liquidity?<br />
A particular focus of this Global<br />
Investor is on market liquidity.<br />
By this we mean the presence –<br />
or absence – of the ability to<br />
sell (liquidate) an asset quickly,<br />
without impacting the market<br />
price significantly, and without<br />
institutional constraints.<br />
Measuring market<br />
liquidity<br />
For many asset classes, bid-ask spreads are<br />
a convenient and straightforward way to measure<br />
market liquidity, with declining (tightening)<br />
spreads indicating greater liquidity, and<br />
vice versa. The spread is simply the cost that<br />
you would incur if you were to sell an asset<br />
on the market and immediately purchase it<br />
back. But, as we will discuss throughout this<br />
Global Investor, the concept of market liquidity<br />
is more complex than that. To start with,<br />
the bid-ask spread is not easy to measure for<br />
many <strong>assets</strong>, such as real estate. Moreover,<br />
market liquidity typically varies dramatically<br />
across the cycle. Some <strong>assets</strong><br />
are highly liquid in<br />
the upswing or the top of the<br />
cycle, but become less liquid<br />
in a downswing. Lastly, instruments<br />
matter. For example,<br />
closed-end funds can deviate<br />
from the value of the underlying<br />
<strong>assets</strong>, which is bad in some ways,<br />
but may also help protect long-term<br />
investors. Some vehicles, such as private<br />
equity funds and hedge funds, may impose<br />
so-called “gates” on their investors to limit<br />
redemptions.<br />
Liquidity<br />
has many<br />
meanings<br />
In the wake of the financial<br />
crisis, the liquidity of the<br />
financial system became<br />
synonymous with its “lifeblood.”<br />
Large injections of<br />
liquidity by central banks (the<br />
ultimate creators of liquidity)<br />
were necessary to save those who “bled”;<br />
the provision of liquidity to safeguard the<br />
economy has remained paramount ever since.<br />
In this context, macroeconomic liquidity does