Liquidity Management By Asset Managers

Transcription

1 Liquidity Management By Asset Managers 4th Luxembourg Asset Management Summit October 22, 2015 Russ Wermers University of Maryland and Office of Financial Research, U.S. Treasury Department 4th_luxembourg_asset_management_summit_21_23_october_2015_final_program

2 Caveat My opinions expressed today do not necessarily reflect those of the Office of Financial Research (OFR), or the Financial Stability Oversight Council (FSOC) in the United States. October 26, 2015 Liquidity Management by Asset Managers 2

3 Motivation for this Discussion A key focus since the crisis has been asset management liquidity Driving this is the perception of these vehicles as shadow banks Asset Management Sector Money-market mutual funds (MMMF) U.S. Size ($Trillions) Regulator(s) 2.7 SecuriFes and Exchange Commission (SEC) ETFs 2.5 SEC and CFTC None Mutual funds (non- MMMF) Ac:ons Taken or Considered 2010 and 2014 Amendments to Rule 2A-7 15 SEC 2014 Data Enhancement; 2015 Proposed Liquidity Rules Hedge funds 3 SEC Form PF (Privately filed with SEC) Separate Accounts (?) Managed: SEC ReFrement: Dept of Labor None October 26, 2015 Liquidity Management by Asset Managers Slide #3

4 Money Market Mutual Funds

5 Background on MMMFs What are money market funds (MMMFs)? Mutual funds that hold only high-quality, short-term, fixed-income securities. (~fonds monetaires / fonds dynamiques) Highly regulated but not insured Additional reforms added in 2010 Types of MMMFs Government and Prime Types of Shareholders Retail investors = you and me, our personal retirement savings (IRAs). Institutional investors = nonfinancial and financial companies, company retirement plans (401k), state and local govts, other mutual funds, non profits. hot money = shareholders of MMMFs that move large amounts of money in and out of MMMFs during both periods of calm and crisis. Who? Economic reasoning suggests large-scale investors where traders have incentives to maximize yield. For example, the cash desk of a large, integrated financial institution such as Goldman-Sachs or JP Morgan 5

6 Despite yielding almost nothing, investors still choose MMMFs to the tune of >$2.5 trillion Money Market Fund Yields and Total Net Assets Monthly, Net yield* (percent) Total net assets ($ trillions) * Simple average of net yields on taxable money market funds. Sources: Investment Company Institute and imoneynet 6

7 Why MMMFs can have a Liquidity Crisis Money market funds have many bank-like features, but no explicit protections of investor capital (e.g., FDIC insurance) Virtually all US money market funds have fixed NAV of $1 per share Risk of runs since portfolio market value can diverge from NAV Structure resembles a demand deposit contract Two (not mutually exclusive) mechanisms can lead to runs: Deterioration in fundamentals / bad future returns Externalities (payoff complementarities) induced by the behavior of other investors. Runs become self-fulfilling prophesies During the days following Lehman bankruptcy (Sep 15, 2008): large-scale withdrawals from prime money market funds October 26, 2015 Runs on Money Market Mutual Funds Slide #7

8 MMMFs & the 2008 Liquidity Crisis 9/15/2008: Lehman Brothers declared bankruptcy 9/16/2008: Reserve Primary Fund held 1% Lehman securities Reserve allowed redemptions at $1 per share prior to 3 pm; closing 4 pm NAV = $0.97 per share. 9/17/2008: Other funds close or require support (Putnam, Wachovia). 9/19/2008: Treasury announces that it will guarantee certain money fund assets Sets up voluntary insurance program for money funds with a NAV of at least $0.995 as of 9/19/2008 Insurance is triggered when NAV falls below $ /19/2008: Fed announced The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility Fed funding of banks buying asset-backed CP from money funds October 7, 2008: Fed announced The Commercial Paper Funding Facility Provide credit to a special purpose vehicle that would purchase three-month commercial paper from U.S. issuers October 21, 2008: the Federal Reserve announced The Money Market Investor Funding Facility Provide credit to a special purpose vehicle to purchase CDs, paper, etc., from MMMFs 8

9 Daily flow (% of previous day TNA) Prime Institutional Prime Retail 0.1 Govt Institutional Govt Retail /01 09/08 09/15 09/22 09/29 10/06 10/13 10/20 10/27 Panel B: Cumulative flows ($ Bil) by category Cumulative $ Flows Daily % Flows Cumulative flow ($ Bil) October 26, /01 09/08 09/15 09/22 09/29 10/06 10/13 10/20 10/27 Date in 2008 Runs on Money Market Mutual Funds Slide #9

10 0.05 Outflows were very heterogeneous Net flow (%) Net flow (%) Q10 Q50 Q /01 09/08 09/15 Quantiles 09/22 of daily 09/29 flows Prime 10/06 Retail funds 10/13 Date 10/20 10/ Daily % Flows for 0.03 Prime Retail Funds Daily % Flows for Prime Institutional Funds Quan:les of Cumula:ve Fund-Level Inst. Flows 9/15-9/19 Q1-59% Q5-40% Q10-37% Q25-20% Q50-6% Q90 +5% October 26, 2015 Runs on Money Market Mutual Funds 09/01 09/08 09/15 09/22 09/29 10/06 10/13 10/20 10/27 Slide #10

11 What Did We Learn from 2008? Prime MMMFs, as a sector, can have a liquidity crisis More money left on Tuesday, relative to Monday, indicating: Investors extrapolated troubles with Lehman commercial paper to all financial commercial paper Uncertainty about who held what contributed to a run in a significant minority of Prime MMMFs Management companies play key role in providing implicit or explicit insurance for Prime MMMFs (so, their depth of pockets and incentives are important!) 11

12 Schmidt, Timmermann, and Wermers (2015) take a deeper look at the crisis week Study Prime MMMF daily flows, for each share class of each fund Identification: Each share class has the same pro-rata claims on cash flows from assets We can identify strategic behavior among different investors (different share classes), while keeping portfolio fundamentals constant With many MMMFs having this structure, we can independently vary fundamentals and investor type 12

13 Institutional investors in low expense ratio shareclasses had larger redemptions n Evidence of a nonlinearity: extremely low EXPR shareclasses had extremely large outflows, all else constant October 26, 2015 Runs on Money Market Mutual Funds Slide #13

14 14

15 Quantile Regression Results 15

16 2010 Reforms Detail October 26, 2015 Liquidity Management by Asset Managers 16

17 2008 Crisis and Resulting Reforms Key 2010 Reforms 1. liquidity provisions (reduced credit and interest rate risk) 2. know your investor rules (prepared for redemptions) 3. transparency (increase oversight and scrutiny of their portfolios) 4. orderly closing process (reduce incentive to run) 5. reducing the amount of lower-rated commercial paper (reduced credit and interest rate risk) October 26, 2015 Liquidity Management by Asset Managers 17

18 MMMFs & Summer of 2011 Taxable Money Market Fund Flows Sum of rolling 5-business day change in assets, $ billions Total Prime Government (Sep 19, 2008) (June 30, 2011) U.S. Debt Ceiling (August 1, 2011) Sep Oct Jun Jul Aug Source: imoneynet 18

19 Gallagher, Schmidt, Timmermann, and Wermers (2015) are first to examine actual investor types in a bank-run scenario In Schmidt, Timmermann, and Wermers (2015), investor types are assumed homogeneous within a given share class Lower expense share classes are found to be more likely to exhibit run behavior during the crisis GSTW (2015) use a unique database that identifies, at a more granular level, investor types 19

20 Money Fund Data Source #1 Extensive panel dataset (imoneynet) of the vast majority of US money market mutual funds Daily total net assets (TNA) of individual share classes Money funds that predominantly cater to institutional investors Money funds that predominantly cater to retail investors Some holdings statistics: % Maturing within 7 days % Treasury % Commercial paper Weighted average maturity Multiple share classes per fund

21 Money Fund Data Source #2 Portfolio holdings data (monthly) from Form N-MFP Detailed data on issuer and security type (commercial paper, repo, Treasury, CD) Available since November 2010

22 Money Fund Data Source #3 Unique additional database from the Investment Company Institute (collected from its members) Year-end shareholdings from different types of investors within each MMMF shareclass: Corporations, non-financial Corporations, financial Retirement accounts Nonprofit accounts Fiduciary accounts State and local governments Retail brokerage-directed accounts Retail individual-directed accounts

23 Some Results of GSTW (2015) 23

24 Ownership of All Prime Funds October 26, 2015 Liquidity Management by Asset Managers 24

25 Distribution of True Institutional Ownership Across Prime Funds (Year-end 2013) October 26, 2015 Liquidity Management by Asset Managers 25

26 Table 9 October 26, 2015 Liquidity Management by Asset Managers 26

27 Flows are a Non-Linear Function of True Institutional Ownership Control variables: gross yield, port. liquidity, WAM, TNA, minimum investment 27

28 Certain Institutions are Most Likely to Run Control variables: gross yield, port. liquidity, WAM, TNA, minimum investment 28

29 Retail Investors Don t Run (or, Even Walk )! Control variables: gross yield, port. liquidity, WAM, TNA, minimum investment 29

30 Effect of IO on Portfolio Holdings Interpretation: Q5 spends more time in Repo reaching for yield, and in Banks 30

31 Non-MMMF Mutual Funds (e.g., equity funds, debt funds, liquid-alt funds)

32 Funding Liquidity Several papers, e.g., Sirri and Tufano (1998) find that retail investors exhibit a convex flowperformance relation (chase winners, do not disinvest from losers) Del Guercio and Tkac (2000) find that institutions exhibit a more linear flowperformance relation Overall, analogous to what we find in MMMFs October 26, 2015 Liquidity Management by Asset Managers 32

33 Asset Liquidity SEC found that funds sell most liquid assets upon redemptions, not a strip of everything Equity funds no worries (so far) Bond funds--??? could be a problem if massive outflows follow rate hikes Empirical evidence: Goldstein, Jiang, and Ng (2015) paper on flows in corporate bond funds Finds that bond funds exhibit a concave flow-performance relation, and more concave when more institutions own the fund Liquid alt mutual funds: anybody s guess, but, so far, this segment is small October 26, 2015 Liquidity Management by Asset Managers 33

34 New SEC Proposals 1. Investment Company Reporting Modernization (Implemented) Monthly holdings disclosure (without delay to SEC) Monthly risk metrics to SEC 2. Liquidity Management Rules (Proposed) Assessment of %-age of portfolio in each liquidity bucket (e.g., 1-day liquidity, 2-3 days, 4-7 days) Swing pricing October 26, 2015 Liquidity Management by Asset Managers 34

35 ETFs

36 ETFs represent 25-40% of total market volume in the U.S.!!! (Great reference: CFA monograph on ETFs published online about a month ago, authored by Joanne Hill of ProShares) Growing concern that speculative (noise) trading in ETFs is creating liquidity problems in the underlying cash securities Massouwi, et al. (2015) find cross-sectional relation between volatility of daily returns and institutional ownership October 26, 2015 Liquidity Management by Asset Managers 36

37 Wermers and Xue (2015) are examining intraday impulse-response functions, a la Hasbrouck (2003) Response of cash index prices when high noise trader buying in ETF, vs. informed trader buying in ETF Results: 1. When noise traders heavily purchase ETF, there is a temporary price dislocation of cash index (~1 minute) 2. When informed traders heavily purchase ETF, there is a more permanent price impact (at least 10 minutes, and maybe more) October 26, 2015 Liquidity Management by Asset Managers 37

38 Hedge Funds

39 Extracts from Form PF October 26, 2015 Liquidity Management by Asset Managers 39

40 Extracts from Form PF October 26, 2015 Liquidity Management by Asset Managers 40

41 Hedge Fund Liquidity OFR researchers are studying the relationship between investor share liquidity and portfolio liquidity in private funds, using Form PF Early empirical results suggest that portfolio liquidity and investor liquidity are strongly correlated across funds. This suggests that funds specialize in strategies with different liquidity profiles and investors select funds based on their anticipated liquidity needs. In such models, funds that expect to trade more heavily in less liquid assets impose tighter share restrictions on their investors October 26, 2015 Liquidity Management by Asset Managers 41

42 Some Lessons Learned October 26, 2015 Liquidity Management by Asset Managers 42

43 A Model of Investor Behavior flow 1,t =f( E[fundliq t+1 ], E[assetliq t +1 ]) flow 2,t =g( E[fundliq t+1 ], E[assetliq t +1 ]) fundliq t+1 =h( fundliq t,flow 1,t,flow 2,t ) where fundliq=funding liquidity and assetliq=portfolio holdings liquidity Liquidity Management by Asset Managers So, these relationships are interconnected, and October 26,

44 Goals of Liquidity-Based Regulations The goal of any liquidity-based regulation should be to make it easy for all investors to determine a fund s liquidity each day, but to make it hard for some investors to have advantageous information and/or higher attentiveness; alternatively, to impose a timevarying redemption cost that takes away any firstmover advantage (e.g., swing pricing) October 26, 2015 Liquidity Management by Asset Managers 44

45 But, Really! However, this is too idealistic Realistic constraints on funds and investors help to reduce the potential for harmful run-like behavior October 26, 2015 Liquidity Management by Asset Managers 45

46 Regulations that Constrain Funds Should Be Procyclical Force increased liquidity during up-market periods October 26, 2015 Liquidity Management by Asset Managers 46

47 Regulations that Constrain Investors Should Be Countercyclical Redemption fees should increase in downmarkets Redemption gating should be possible in downmarkets Swing-pricing should be more severe in downmarkets October 26, 2015 Liquidity Management by Asset Managers 47

48 Where is Research Needed? MMMFs: Effect of new regime, starting Oct 2016, on liquidity and potential for investor runs Mutual Funds: Effect of new monthly disclosure, new liquidity rules ETFs: effect of growing scale and scope on cash securities markets Hedge Funds: New Form PF data (but, must spend significant visit at SEC or OFR) Separate Accounts: Made possible by new disclosure rules October 26, 2015 Liquidity Management by Asset Managers 48

49 Conclusions Many changes in the MMMF landscape 2008 MMMF crisis, 2010 Amendments to Rule 2A-7, 2011 Eurozone and Debt-Ceiling crises, 2014 Amendments to Rule 2A-7 Liquidity seems to have improved, but no big crisis to stress test Mutual funds, especially bond funds and liquid alts, present liquidity risks in a stress event Hedge funds October 26, 2015 Liquidity Management by Asset Managers 49

50 Conclusions (continued) Truly exciting and opportune time to study asset management issues, especially liquidity and systemic risks October 26, 2015 Liquidity Management by Asset Managers 50