It also provides the means to swoop on assets volunteered by forcedsellers. “We didn’t build our risk framework because we thought that the investment world would be coming to an end – we are terrified that insufficient risk management would force us to change investment policy mid-stream,” Rieck says. “We wanted to be in a position that if something bad happened, we could take advantage of it and buy a once-in-a-generation asset in a capitalstarved world.” Frontier now advises clients to ensure that, in the future, they can access ongoing liquidity for operational as well as opportunistic reasons – to “appropriately” increase the levels of investment risk in their portfolios.

Until interest rates in

Australia fell, super funds were invested in cash to earn a positive return while other asset classes suffered. “But that’s not the case anymore,” Fok says. “Now it is about achieving the flexibility to take advantage of opportunities.” “Before, we thought that in the long-run, cash was a drag,” Fok adds. Now, it is drawn on to support operations as funds lay plans to have access to sources of liquidity other than cash and equities. They have come to recognise that asset classes often outperform and incur losses at different times.

In a paper issued in October 2008, Liquidity Considerations in Today’s Environment, Dallas and Saviano of Cambridge Associates recommend that clients review all their hedge fund holdings and aim to minimise lock-ups where possible – even if this results in higher fees – so that, if necessary, these investments can serve as potential sources of liquidity in the next few years, since hedge funds have generally outperformed listed markets.

Institutions should also take advantage of bear market rallies to sell assets at higher prices in order to better fund rebalancing activities. “Until credit markets stabilise and the earnings cycle bottoms out, it is likely that rallies in risk assets will prove ephemeral, making more aggressive rebalancing an important strategy for both raising cash and locking in gains,” the consultants write.

To arrive at innovative liquidity management techniques in the future, super funds would benefit from the input of people involved in various areas of fund operations. Executives, investment committee members, asset consultants and administrators are all privy to different pieces of information about liquidity. While administrators work out benefit payments, investment personnel know the fund’s allocations and day-to-day market conditions, as well as longer-term trends. “It would be worthwhile to combine these pieces of information together,” Fok says, both now, and in the future.