Alternatives require daily liquidity risk monitor - KPMG
NETHERLANDS - KPMG is advising Dutch pension should increase the monitoring of their liquidity risk following an increased allocation to alternatives.
Edward Snieder, associate partner at the consultancy, has suggested pension funds should try to gauge the different kinds of liquidity risks following their investment strategy as, for example, derivatives based on difficult to value US property produce liquidity risk of a different level to other assets.
"In order to stay in control, [pension funds] subsequently need to make clear arrangements with asset managers about mandates, and to monitor and steer the liquidity risks, as part of their daily risk management," Snieder argued.
"Although alternatives, such as private equity, hedge funds, commodities and property can generate attractive returns, their general nature is illiquid. The resulting market valuation offers little transparency, which can affect the performance-related fees," he added.
Pension funds need to continually monitor managers' skills in dealing with liquidity risk as it is crucial asset managers have room to generate extra returns while limiting liquidity risk, suggested KPMG adviser Alae Laghrich, who added "government bonds can become illiquid as well, if their tradability decreases".
Snieder suggested pension funds could increase their insight into by giving different financial instruments a liquidity score and by agreeing clear limits with their asset managers.
"If you are dealing with complex derivatives, understanding the development of the value of illiquid investments is paramount in getting to grips with the reported performance as well as the fees for the asset manager," argued Snieder.
Pension funds with a high number of older participants should be especially aware of their liquidity risks as they need more liquid assets in order to meet their liabilities, stressed the KPMG partner.
Snieder has estimated approximately 92% of Dutch pension funds have contracted out their asset management.
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