The majority (52%) of institutional investors in the Asia-Pacific (APAC) region believe decreased market liquidity is a secular shift, requiring a new strategic approach in order to succeed in the new and complex environment, according to a new study.

Regulations stemming from the 2008 financial crisis, coupled with historically low interest rates and slow rates of growth in the global economy have constrained the ability of many US and European banks to perform their traditional roles as market makers which has impacted broader market liquidity conditions. This is based on new research from State Street Corporation released in partnership with the Alternative Investment Management Association (AIMA), the global representative of alternative investment managers.

“Although we are not currently seeing a shortage of liquidity in APAC, conditions in developed markets may result in a knock-on effect on our region, as APAC financial institutions with US and European operations are impacted by post-crisis regulatory reforms in those markets,” says Colin Zhong, head of State Street’s Global Market business in APAC. “This has prompted institutional investors to renew their focus on liquidity management.”

More than 90% of respondents from APAC say current market liquidity conditions have impacted their investment management strategy, with 36% rating this impact as significant, and reassessing how they manage risk in their investment portfolios. More broadly, they are adjusting to a new liquidity paradigm in which trading roles have been transformed, new market entrants are emerging, and electronic platforms and peer-to-peer lending are changing the way management firms transact their business.

“Increased regulation and the pressure to manage costs has significantly changed market liquidity conditions,” says Zhong. “This is causing many players in the investment industry to think again about the fundamentals: what roles they play, where they invest, and how they transact their business.”

While there is no one-size-fits all strategy for balancing risk and return in the current market environment, investors and managers are adapting to this new normal by focussing their efforts in four areas.

·  Rationalizing the risk: The liquidity shift has serious ramifications for investors globally. They are seeking to develop the right strategies and tools to help them succeed in this complex new environment. This includes improving the way they measure and report on liquidity risk, and reassessing how they manage risk in their investment portfolios.

·  Optimizing the portfolio: Investors and managers are shifting their allocation strategies to take account of new liquidity conditions. While more liquid fund vehicles such as ETFs have been gaining ground, a holistic strategy that balances risk with return across the whole portfolio is critical.

·  Digital solutions: The new liquidity paradigm is causing many players to look to technology to create efficient and cost-effective electronic trading platforms, which will encourage greater liquidity in fixed income and derivatives markets.

·  Regulation: Today’s market liquidity conditions in the US and Europe are a result of post-global financial crisis bank regulation. It is critical for APAC investors to maintain regulatory visibility and awareness of global and regional regulatory risk.