What happens when everyone wants their money back at once?

1. What is Liquidity Risk?

Open-ended funds are built on a promise: investors can enter and exit (almost) anytime they want. But this flexibility can quickly become a vulnerability. When markets panic and many investors want to redeem at the same time, fund managers may be forced to sell illiquid assets at steep discounts. This harms remaining investors and can even pose systemic risks. This was seen in the early days of Covid-19, when the markets tanked and many investors pulled out their money, leaving funds starved and unable to satisfy remaining redemption obligations.

As portfolios often include a mix of assets with varying liquidation timelines, the mismatch can be costly.

Behind the scenes, fund portfolios often consist of:

• Liquid assets consisting of listed equities (within the day in most circumstances)
• Less liquid assets consisting of corporate bonds (may take a few days to a week)
• Illiquid assets like real estate (may take weeks, months or even years)

When managers are forced to sell the less liquid portion of their portfolio, long-term investors may be left shouldering the cost, whereas the first to exit benefit from first-mover advantage.

Recent updates from the Financial Stability Board (FSB), Monetary Authority of Singapore (MAS), and International Organization of Securities Commissions (IOSCO) have indicated that liquidity risk management is a fundamental concept of portfolio and asset management.

2. Building Liquidity into the Fund’s DNA

Effective liquidity risk management isn’t something that can be bolted on during a crisis. It must be woven with a solid internal framework that embeds liquidity into strategy, governance, and operations.

Here’s what strong liquidity management looks like:

• Strategy: Define and regularly review a liquidity strategy. This must be approved at a senior/board level
• Governance: Appoint a liquidity risk committee and escalate issues swiftly during stress.
• Controls : Set and monitor limits on funding mismatches and concentration.
• Contingency Plan: Establish tested plans for liquidity shortfalls, including emergency tools.
• Data & Systems: Enable real-time visibility into cash flows, redemptions, and asset liquidity

MAS’ 2025 speech at the Investment Management Association of Singapore (IMAS) Regulatory Forum made it clear: fund managers must shift focus beyond policy and toward proactive surveillance, scenario-based forecasting, and board-level accountability.

3. The Crisis Toolkit – Tools to Protect, Not Panic

Liquidity risk management isn’t just about planning.  When markets fall and redemptions surge, fund managers need tools in place that protect both the exiting as well as the remaining investors equally.

Price-Based Tools: Adjust the NAV to reflect real costs	Volume-Based Tools: Temporarily slow the outflow
– Swing Pricing adjusts the fund price based on estimated transaction costs during redemptions. – Anti-Dilution Levies pass transaction costs directly to redeeming investors. – Dual Pricing or Bid/Ask Valuation methods allow for fair pricing between buyers and sellers. – Subscription/Redemption Fees ensure that the fund isn’t bearing the cost of turnover.	– Redemption Gates limit redemptions. – Fund Suspensions can pause all redemptions during extreme volatility. – Extended Notice or Settlement Periods give managers time to liquidate assets responsibly. – Side Pockets separate illiquid assets from the main fund, protecting liquidity.

“Liquidity tools are not meant to hide risk. They’re designed to protect the collective interest.” — IOSCO Final Report 2025.

The key is not just having access to these tools, but knowing when and how to activate them. Regulators now expect fund managers to demonstrate that these tools are part of the day-to-day risk management approach — not just emergency levers.

4. Preparing for the Worst – The Financial Fire Drill

Stress testing, as mentioned in the MAS’ Liquidity Risk Management guidelines is no longer just an annual exercise. Fund managers must model realistic worst-case scenarios:

These tests must be tailored to the fund’s structure, asset types, and investor base. And they must feed directly into decisions (and positions) — whether that’s rebalancing the portfolio, revisiting redemption terms, or preparing to activate Liquidity Management Tools.

5. Turning Compliance into Strategy

Liquidity risk is no longer an abstract concept reserved for risk management teams. It sits at the core of investor protection, reputational stability, and regulatory strategy. The most future-ready fund managers are already embedding these expectations into their product design, governance, and operational build outs.

That said, implementation isn’t always smooth. However, leading fund managers are flipping the script — turning operational friction points into a competitive edge.

Why It Matters

• Protects long-term investors from dilution
• Reduces contagion across funds and markets
• Deters speculative redemptions
• Supports market stability in volatile times

Why Partner with Curia Regis?

Effective liquidity risk management is more than just meeting regulatory expectations — it’s about safeguarding investor trust and fund resilience. At Curia Regis, we help fund managers reconcile their liquidity risk management obligations with their requirements, which includes aligning redemption terms, implement stress testing, and operationalise liquidity tools efficiently. Reach out if you require our expertise and proactive approach to help ensure your business is operating in accordance with regulatory expectations and international best practices.

If you need support translating liquidity risk expectations into practical compliance, please reach out to us here or email us at admin@thecuriaregis.com.