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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

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