Working Paper Series no. 775: Overview and Inventory of French Funds' Liquidity Management Tools

This article is an initial presentation of the prospectus analysis tool produced by means of cooperation between the AMF and the Banque de France. It aims to identify the liquidity management tools (LMTs) put in place by French funds. This work was initiated in 2019 to monitor the progress in appropriation of these devices by the funds over time, and to compensate for the lack of an exhaustive regulatory database. The text mining method is based on ‘automated reading’ of prospectuses, looking for keywords and expressions associated with liquidity management tools. Despite technical limitations, this study programme represents an innovative basis for work complementing the qualitative or partial surveys currently performed on the subject, by providing an initial quantitative estimate of the tools mentioned in the prospectuses (and hence reported to the fundholders). 

The computer code could be adapted in response to other issues (fees, socially responsible investment, etc.) or else extended to other jurisdictions (since prospectuses are public by nature).

Before presenting the first results relating to the liquidity management tools referred to in prospectuses at the end of 2019, it seems necessary to precisely identify and describe these tools, their legal and regulatory framework, and the way in which they are formalised (or not) in the prospectuses. This article therefore recalls the European and French framework with regard to liquidity management (Part 1) and describes the tools available to fund managers (Part 2). The last part presents the results of the analysis of French funds' prospectuses at the end of 2019. This analysis, which covers 9,768 prospectuses of funds in operation as of 31/12/2019, corresponding to a total net assets of €1,6 trillion (i.e. 98% if the total net assets of French funds) provides the first quantitative view of the liquidity management tools mentioned in the prospectuses, detailed by major fund type but also by asset class.

This analysis shows that, as at 31 December 2019, the possibility of completely suspending redemptions in exceptional circumstances was mentioned in 71% of the prospectuses (82% of total net assets), and the possibility of proposing redemption in kind was indicated for 65% of fund unit classes (74% of net assets), although the conditions of exercise of such an option make it hard to implement in practice. 

14% of the net assets of French funds were covered by a reference in the prospectus to at least one liquidity management tool strictly speaking (i.e. anti-dilution levies, gates or swing pricing). Anti-dilution levies were the least common (they only concerned less than 2% of the net assets of French funds). Next came swing pricing for 6% of net assets, and redemption gates for 9%.

UCITS, and in particular UCITS that measure their global risk using the value-at-risk method (VaR), seem to make more use of the latter two tools: swing pricing is indicated for 36% of the net assets of VaR-UCITS and 16% of the net assets of UCITS, while gates are indicated for 35% and 14% of the net assets respectively. AIF prospectuses refer to these tools far less often: they concern 6% of the net assets for gates, and less than 0.5% for the other two tools. 

In terms of investment strategy and asset classes, the anti-dilution levy mechanism is introduced more often by equity funds (7% of net assets) and by other funds (9%), whereas it is practically inexistent in the other asset classes. The funds reputed to be less liquid are those most covered by gates, which concern 19% of the net assets of real estate funds, 15% of other funds and 32% of the net assets of hedge funds. Lastly, swing pricing is mentioned mostly by bond funds (19% of their net assets).

A pedagogical effort is required to foster a greater uptake of these liquidity management tools by the funds, but also to ease their acceptability from the point of view of investors, whether retail or institutional.

In light of the current economic and financial situation in the context of the Covid-19 pandemic, it is possible that certain regulatory constraints may be adapted, but this document could nevertheless constitute a useful inventory of pre-crisis tools. In the future, this work could allow dynamic monitoring of the introduction of LMTs in French funds, and be extended to other jurisdictions or other issues..