‘Too big to fail' asset managers could suffer the equivalent of a banking run if a strategy began to suffer, the Bank of England's financial stability director has warned.
Thanks to the demands of an older and richer population, assets under management (AUM) may reach $400trn by 2050, according to the Bank’s predictions.
However, Andrew Haldane warned the increasing concentration of large fund managers meant the failure of a single strategy could have huge implications for market liquidity.
He said: “One example would be an asset fire-sale. This might arise if assets from a failing fund were offloaded at a pace and scale that caused indigestion in the underlying market.”
“This fire-sale friction might be fanned by the actions of investors or counterparties. Falling asset prices may be the prompt for withdrawal (in the case of open-ended funds) or sales (in the case of closed-end funds).
“In some respects, this would mimic a banking “run”, albeit operating through non-conventional channels.”
Regulators are still at early stages in trying to understand how a 'too big to fail' asset management industry could be at risk, he acknowledged.
In particular, the demand for better yields is driving active managers into more illiquid asset classes, he added, while the growth of passive funds heightens a risk of a herd mentality among investors.
Haldane predicted an “Age of Asset Management” fuelled by a wealthier global population with a longer retirement to save for.
The ten biggest fund managers control nearly 30% of total global assets – a higher concentration than that of the largest banks, which control roughly 20% of global assets, according to the BoE.
Haldane said 'Black Swan' risks may be real and rising: “Past performance is no guide to the future. This is especially true in an industry as large and as rapidly changing as asset management, with asset portfolios becoming less liquid and more correlated and investor behaviour becoming more fickle and run-prone.
“Future illiquidity pressures in financial markets, generated by asset management distress or wholesale portfolio reallocation, may be larger and more potent.”
But he added any failure in the industry could look very different to that of the banking crisis, and historical examples were restricted to “small corners” of the financial system.
Haldane concluded that policymakers should attempt to encourage long-term investment, consider the use of macro-prudential tools that have hitherto been focused on banks, and decide the extent to which asset managers are systemically important financial institutions.