The Financial Stability Board (FSB) and International Organization of Securities Commissions (IOSCO) have suggested some significant changes in the operation of open-ended funds, particularly property funds, to protect liquidity. Two notable ones: swing pricing and exit fees.
Nothing fatally stabs financial services the way mismatched liquidities can. In the 1980s during the savings and loan crash, the institutions were caught between heavy long-term mortgage lending and deposits that required much higher rates as the Fed battled inflation at the time. In 1998, Long Term Capital Management collapsed in a liquidity squeeze, got a bailout, and eventually went out of business. The 2008 collapse of Lehman Brothers was another liquidity squeeze. Multiple banks this year closed after assets no longer worth what they were booked at couldn't keep up with bank runs.
Blackstone and Starwood non-traded REITs were hit with big withdrawal demands at the end of 2022 and into 2023. In both cases, Asia — where investors tend to use higher levels of leverage and many faced margin calls over turns in their domestic markets — was the source of many of the redemption requests. But properties are not a typically liquid asset and owners need to find buyers to close out positions.
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Blackstone's REIT just reported a significant drop in withdrawal requests in June. In a letter to shareholders this week, BREIT said it received $3.8B in requests for withdrawals from the $70B fund in June, nearly a third lower than the peak reported in January.
The FSB and IOSCO have taken the position since 2017 that such asset management companies have structural vulnerabilities and need anti-dilution liquidity management tools (LMTs) to prevent runs on funds.
"Property funds in particular, whose assets can take time to sell, have come under pressure in recent years as investors rush to withdraw their cash, spooked by rising global interest rates and depressed commercial real estate valuations," wrote the Financial Times. "Regulators are concerned redemptions can spiral out of control if they force the fund to sell illiquid assets at knockdown prices, further spooking investors."
"There's a substantial portion of the funds industry with significant illiquid assets," Martin Moloney, Iosco secretary-general, told the paper.
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