At the FSOC’s recent asset management conference, academics and industry participants discussed risk in the asset management industry. The conference included three panels which addressed:
- Investment activities and risk management practices in the asset management industry
- Industry characteristics and the interaction of asset management activities with the broader financial system and
- Key operational functions and what, if any, obstacles exist to resolving a failing manager or fund in a rapid and orderly manner.
While each of the panels addressed a slightly different issue, some common themes did emerge. Like Norm Champ in his overview of the fund industry, the industry participants contrasted the asset management industry with banking, emphasizing the agency nature of the asset management business. While several of the academics suggested that “herding” or “amplification” may exist when asset managers make similar investment decisions, the industry panelists pointed at that their investment decisions were driven by client demands rather than the managers’ own decisions. Connected with the agency nature of their relationships, the industry participants also emphasized the fiduciary duties they owe to their clients. Participants also underscored that the fiduciary duty is owed to each fund individually because each fund is a separate legal entity.
Another common topic discussed by the panels was run risk or run-like behaviors. Participants pointed out that even all funds selling equities would not result in a run because redeeming shareholders would not receive less than the net asset value of the fund. Closely related to run risk was the first mover advantage that was addressed by several of the academic participants. They expressed concern that a “first mover advantage” could exist in products beyond money market funds because redemption proceeds do not deduct redemption costs. While recognizing that it was possible that remaining shareholders could be affected by decisions of redeeming shareholders, the industry panelists emphasized their efforts to mitigate this risk as much as possible.
The issue of a liquidity mismatch also was addressed by a number of participants. However, several panelists pointed out that funds monitored liquidity closely to balance between client desires to be fully invested and having the liquidity required to meet redemptions. Further, they pointed out that open-end funds in particular are subject to liquidity restrictions. Finally, as one participant pointed out, illiquid securities are part of smaller markets that by definition are less important to the functioning of the economy as a whole.
Panelists also addressed the issue of failure of asset managers. The speakers emphasized that the safeguards inherent in the system, particularly third party custody, facilitated the orderly transition of one manager to another following a failure.
A number of panelists discussed money market funds. Panelists underscored the fact that money market funds were only one segment of the diverse asset management industry. In addition, they pointed out that the SEC was working to address risk issues present in these funds with its 2010 reforms as well as its 2013 proposal.
Finally, the academics expressed concern about data gaps that made it difficult to predict where systemic risk may exist. However, Norm Champ and several other panelists discussed the wide array of data that the SEC and other regulators receive from registrations. Further, panelists discussed the need to balance the desire for information with protection of asset managers’ proprietary investment decisions.