Many investors are aware of the potential drawbacks when they allocate to illiquid strategies. But others have allocated to illiquid assets in search of higher returns without sufficient knowledge of the pitfalls.
The main problems evidenced so far stem from funds offering same-day liquidity to clients while investing in asset classes that have less liquidity. Less obvious is the potential illiquidity risk of ordinary equity and bond funds, which in theory invest in deep markets and can easily buy and sell assets whatever the market conditions.
But even in these funds, liquidity risk exists and can be triggered by large redemption requests or other cash outflows. Today’s corporate bond investors will only find out if they are really holding liquid assets if there is an unexpected rise in interest rates.