Liquidity goes down the drain

Liquidity: investors want it and funds need to provide it. But what this actually means in practice covers a multiplicity of meanings and motivations. Hedge Funds Review finds out what mistakes were made in 2008 and how these can be avoided in future.

Although the liquidity problems that afflicted hedge funds in 2008 have receded, the industry needs to find better ways to understand and manage liquidity risk in order to avoid a repeat of last year’s fiasco.

The core problem for hedge funds is the absence of an industry-standard method for defining and measuring liquidity risk.

“There are various theories on how to incorporate liquidity risk within a standard risk model like value at risk, but none of these have been widely accepted,” says