In recent years the risks of potential liquidity mismatches on investment fund level, between the liquidity of the funds’ assets and the liquidity offered to its investors have amplified. In this regard, the European Securities and Markets Authority (ESMA) published its final report in relation to liquidity stress testing (LST) of investment funds applicable to both UCITS and AIFs.
Investment Managers should assess the time and cost to liquidate, whilst simultaneously maintaining the standard and consistency of the Fund’s total risk profile. The main aim will be to stress test both the asset and liability side of the portfolio of the Funds being managed, to conduct both historical and hypothetical scenario liquidity stress testing, whilst simultaneously factoring in the investor type, concentration and location. LST frequency should be determined based on the funds characteristics however, a quarterly frequency is recommended.
