A Primer on Liquidity from an Asset Management and Asset Allocation Perspective

Abstract

It’s vital to effectively manage liquidity because its absence can result in significant losses, especially during periods of market turmoil. In this article, the authors discuss the practical aspects of managing liquidity within funds and multiasset portfolios. It complements existing research by providing a primer on the topic of liquidity from the unique perspectives of both asset managers and asset allocators. As it relates to funds, the authors provide an overview of the importance of managing liquidity and regulations surrounding it; liquidity classification of broad assets and subasset categories; and liquidity measurement, monitoring, and management programs. For asset allocators, the article discusses important elements such as 1) incorporating liquidity assumptions of illiquid assets into an asset allocation optimization approach and 2) a rebalance method selection framework and liquidity considerations.