Displaying items by tag: liquidity
While some alternative managers have been benefiting from the market volatility, it’s been a challenging environment for fundraising. In fact, some of the top brand-name firms are having trouble hitting their targets, let alone their hard caps, according to industry insiders. While there are several reasons for this, liquidity issues among limited partners from the "denominator effect" is high on the list. The denominator effect is when volatility in the public markets impacts fundraising in the private markets. It occurs when the value of one portion of a portfolio decreases drastically and pulls down the overall value of the portfolio. Last year, capital commitments were down 1.4% to $497.3 billion as of Dec. 22 compared to $504.3 billion in all of 2021, according to Pensions & Investments data. Private equity was the only alternative category in which both the number of funds and the amount of capital committed increased in 2022. However, fundraising by private equity funds worldwide was down 41.8% year over year in the third quarter of last year based on data from Preqin. According to Adam Bragar, New York-based head of the U.S. private equity practice of Willis Towers Watson PLC, “Whether the slowdown in commitments will continue into 2023 depends on investors' current and projected liquidity.”
Finsum: It’s been a challenging fundraising environment for alternative managers stemming from liquidity issues among limited partners due to the denominator effect.
The private REIT market was recently rocked by the decision of Blackstone and Starwood, which manage two of the nation's largest private REITs, to limit and prorate investors' repurchase requests because they exceeded redemption restrictions. Private REITs are real estate investment trusts that are exempt from SEC registration and whose shares do not trade on national stock exchanges. While the private REIT market flourished during the low interest-rate era between 2017 and 2021, the expectation that interest rates will continue to rise could make it difficult for these private funds to perform well in the future. That and a perceived gap between the performance of nontraded private REITs and public REITs led to a surge in investor redemptions for Blackstone and Starwood. Both firms are trying to shore up their funds’ liquidity through redemption restrictions. The Blackstone Real Estate Income Trust (BREIT), which has $125 billion in assets under management, announced the closing of redemptions for this quarter in a letter to shareholders last week. The announcement from the Starwood Real Estate Income Trust (SREIT), which is valued at about $14.6 billion, came more recently over the weekend.
Finsum:Rising interest rates led to a surge in investor redemptions for private REITs, resulting in Blackstone and Starwood restricting redemptions this quarter.
According to Pensions & Investments' annual survey of index managers, worldwide indexes managed in exchange-traded funds and exchange-traded notes have fared much better than index assets in other wrappers. Worldwide index assets managed in ETFs and ETNs totaled $6.51 trillion as of June 30th, down 4.8% from $6.84 trillion last year. Worldwide index assets overall fell 12.7% to $18.23 trillion. Exchange-traded products continued to see strong inflows despite headwinds such as inflation, rate hikes, and stock and bond losses. In fact, the global ETF industry saw its 40th straight month of net inflows during September and is on pace for annual net inflows that will be second to only last year's record of $1.29 trillion according to research and consultancy firm ETFGI LLP. Emily Foote McKinley, Head of Institutional Specialists for ETFs and Indexed Strategies at Invesco Ltd explained why ETFs continue to see strong inflows this year. She told Pensions & Investments, "I think that we've always seen the biggest pickups in institutional usage of ETFs around and after times of severe market volatility. That's because the ETF wrapper is able to prove itself as a provider of liquidity and access and transparency to underlying markets in times of crisis."
Finsum:ETFs continue to see massive inflows this year despite market volatility due to the wrapper’s ability to provide institutional investors with liquidity and transparency.
Yields on developed market government bonds have been soaring this year, as a result of higher inflation, sharp rate hikes, and quantitative tightening. The latter of which is what has traders nervous right now. The Federal Reserve is looking to increase the pace of winding down its nearly $9 trillion balance sheet, while the European Central Bank has also been looking to shrink its €5 trillion bond portfolio. Central banks built up their balance sheets with bond purchases to help provide a stimulus for the economy, but with the current high inflation, banks are now looking to sell those bonds. With the bond market already facing pressure due to the rate hikes, further quantitative tightening could make trading even more difficult by worsening liquidity and increasing volatility. The Bank of England has already been forced to delay its quantitative tightening due to turmoil in the UK bond market. That turmoil, which also spread to the U.S. and European bond markets, has only added to the liquidity and volatility concerns.
Finsum:An increase in Quantitative Tightening by central banks could lead to more volatility in the bond markets.
According to an index that measures Treasury market volatility, bond volatility is at a level not seen since the peak of the COVID market crisis in March 2020. This is a worrisome sign that the Treasuries markets, which are considered a safe haven for investors, are not functioning as they should. For context, the biggest one-day move for the benchmark 10-year Treasury in 2021 was 0.16. This year, there have been seven days with larger moves. Liquidity is evaporating, which has caused the soaring volatility. A Bloomberg index is currently showing that liquidity in the Treasury markets is worse now than in the early days of the pandemic, while implied volatility, measured by the ICE BofA MOVE Index is near its highest since 2009. This is coming at a time when Bloomberg News reports that the largest buyers of Treasuries, including Japanese pensions, life insurers, foreign governments, and US commercial banks, are pulling back at the same time. Even Treasury Secretary Janet Yellen has expressed concern about a potential breakdown in trading, saying that her department is “worried about a loss of adequate liquidity” in the US government securities market.
Finsum: A lack of liquidity and a pullback in large-scale treasury purchases has triggered volatility not seen since March 2020.