Redemption periods and liquidity mismatch in the investment funds market: the litigation risks

The recent announcement by the FCA of its consultation into liquidity mismatch in authorised open-ended property funds (CP20/15), has once again cast a spotlight on the risks arising from mismatches between the redemption periods offered by investment funds and the liquidity of the underlying assets.

The focus of the current FCA consultation is on funds investing directly in property, for example offices, shops and warehouses. However, over the past few years, international regulators have regularly raised more general concerns about liquidity mismatch in the open-ended investment funds market.

We know from the 2008 global financial crisis, from market reaction to commercial property funds following the UK’s referendum on EU membership in 2016, and more recently as a result of market turmoil triggered by the COVID-19 pandemic that - in times of stressed market conditions - there is likely to be an increase in both retail and institutional investors seeking to cash in or transfer assets held in investment funds, which may lead to a liquidity crisis.

Given the ongoing difficulties and interest in this area, we thought it would be helpful to share an article we published in the Journal of International Banking & Financial Law in late 2019, considering the litigation risks which may arise as a result of the mismatch between redemption periods and liquidity. We provide a detailed analysis of the potential causes of action an investor may have against various potential defendants, including: the investment fund itself, the fund manager, the depository, the fund administrator, auditors to the fund, and the investor's own investment manager/adviser.

The article can be found here: Redemption periods and liquidity mismatch in the investment funds market: the litigation risks