New York Fed warns that asset managers are vulnerable to 'runs'

By Robin Wigglesworth
Financial Times, London
Thursday, February 18, 2016

The New York Federal Reserve has warned that asset managers are vulnerable to quasi-bank runs that can cause "significant negative spillovers" across financial markets.

The combination of deteriorating trading conditions -- especially in corporate bonds -- and the swelling of the US mutual fund industry that promises investors the ability to redeem money at a moment's notice has become an increasing concern for some policymakers, fund managers, and analysts.

While the New York Fed's researchers have argued that bond market "liquidity" is not as bad as many traders and analysts maintain, they have examined the vulnerability of mutual funds to a sudden spurt of investor withdrawals, and concluded that they are indeed susceptible to "runs" despite not using leverage.

"The price dislocations that follow after large redemptions and liquidations are quite significant and have market-wide implication," the New York Fed's researchers said on the central bank's Liberty Street Economics blog. "Investors seem to have become more skittish since the crisis and are quicker to redeem shares, and in larger amounts, for a given degree of underperformance." ...

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http://www.ft.com/intl/cms/s/0/4c000bba-d662-11e5-829b-8564e7528e54.html