Many institutional investors have a Chief Risk Officer assisting the CIO to measure and monitor portfolio volatility. However, for many long-term investors (e.g., pensions, sovereign wealth funds and defined contribution plans) volatility comes and goes and volatility risk is rarely life-threatening. In contrast, liquidity events can create a sudden and unexpected need to raise cash and can threaten a fund’s survival. Liquidity risk can force a CIO to make undesirable and often costly portfolio decisions.
What makes fund liquidity management particularly challenging are: (1) the need to integrate all aspects of a fund’s liquidity demands and sources: top-down asset allocation, bottom-up private market deal-making activities, and internal and external operations and (2) the need for a long horizon in a world brimming with large and growing portfolio allocations to illiquid private assets.
Both liquidity demands and liquidity sources are evolving. A robust liquidity management function, working closely with other investment and risk officers at a fund, should constantly adapt to the dynamics of the market and regulatory environment and surveil any emerging liquidity demands and sources. Currently, a fund’s liquidity management may be fragmented or ad hoc, putting the fund at risk. Given the importance of liquidity management, why do we not observe many funds with a dedicated liquidity management team, or perhaps even a designated Chief Liquidity Officer?
The full paper is available at https://www.pgim.com/white-paper/there-need-chief-liquidity-officer