Another European fund manager runs into concerns over liquidity

COMPANIES AND governments need to borrow money for years or decades. But ordinary savers often want instant access to their nest-egg. That age-old mismatch is the origin of many of modern finance’s intermediaries, from banks to fund managers. They promise to lend money for long periods, backed by money they must return to their own creditors and investors at the drop of a hat. Aided by regulation, the arrangement usually helps savers to save and borrowers to borrow. The trouble is, it does not always work so seamlessly.

Fears over the “liquidity mismatch” created by such intermediaries have recurred in recent months, notably in Europe. They resurfaced on June 18th, when an article in the Financial Times highlighted how H2O, a fund manager based in London that invests mainly in government and big-company bonds, had a sideline lending money to smaller businesses. Their bonds are far less liquid, meaning that it may be hard to find a buyer quickly and at a reasonable price should the need arise. In theory, that might result in the fund being unable to repay its own customers immediately, should many of them demand the on-the-spot access they had been promised.

Investors took fright. It hardly helped that the illiquid bonds in question (worth €1.4bn, or $1.6bn, out of about €30bn in assets under...

via The Economist: Finance and economics Business Feeds

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