Warning: Some of the Market's Vast Liquidity Is a Mirage
A star fund manager’s stumble over liquidity is just a beginning. Far more will fail the test when there’s a downturn.
When investors need it, there won’t be as much liquidity as they think they see now.
Photographer: Franck Fife/AFP, via Getty Images
Beware of learning too few lessons from the difficulties facing Neil Woodford’s equity fund in the U.K. The takeaway is not simply to watch out for other open-ended funds with lots of inherently illiquid holdings. The case is also a warning to look seriously at the market as a whole – elements of which have grown too comfortable and too complacent operating in the ample liquidity pumped in by years of unconventional central bank policies. An economic downturn or a financial shock could create liquidity-induced dislocations that would heighten investor insecurity and complicate companies’ access to capital.
But it hasn’t happened yet. Regulators have a chance to recognize this and reduce the threat, lest the growing risk of structural financial instability also inflict economic damage.