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Tickling the Dragon’s Tail

Many institutional investors have increasingly large allocations to less-liquid and illiquid assets. When markets become stressed, what are the added risks to portfolios and what are the added risks system-wide?

Blue geometric cone shapes stand against black shadows.

11/24/2023

7 min read


Topic

Multi-Asset

Key takeaways

  • As investors have allocated more assets to illiquid investments such as private equity, the potential for market fragility has increased.
  • An imbalance between the sources and uses of cash can trigger a liquidity squeeze and result in the forced selling of assets.
  • Because demands of illiquid assets are first met by selling liquid public market assets, investors holding the least amount of illiquid assets are often hurt the most.
  • There is a tipping point in the size of the illiquid allocation; once the tipping pint is breached, the more illiquid assets held, the worse the performance.
  • This is not all bad news, as fragile markets also open up opportunities for investors in preservation of liquid capital, trend-following strategies, and liquidity analysis.
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