But a fund selling material amounts of less liquid assets in one day to meet redemption pressures could find itself receiving less than these quoted prices.19  18  In the US, structural reforms in 2014 preserved ‘constant NAV’ status for institutional funds only where they invest in government bonds. Any fund offering constant NAV much have the ability to implement a redemption liquidity fee and gates during times of stress. In Europe, reforms of 2017 preserved constant NAV for funds invested in sovereign securities. 19 As part of its Financial Sector Assessment Programme for Ireland, the IMF estimated that it could take a high-yield credit fund up to three days to meet redemptions worth 10% of its assets. To ensure redeeming investors would not benefit at the expense of remaining investors, the fund manager would need to know exactly how much selling three days’ worth of assets in one day would move the price and adjust its quoted NAV accordingly, which is highly uncertain. 11  All speeches are available online at www.bankofengland.co.uk/speeches  11  Without other measures, redemptions from funds invested in less liquid assets can transfer economic value from remaining to redeeming investors. That could create an incentive to be on the side of the redeemers. It could create a first redeemer advantage. This isn’t much of an issue for funds invested in liquid equity markets, where large amounts can be sold at quoted prices at short notice.
20  Baranova, Y., et al. (2017), ‘Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds’, Bank of England Financial Stability Paper, no. 42, (July) 21 Baranova, Y., et al, (2015), ‘Has corporate bond market liquidity fallen?’, Bank Underground, available here. 22 See the December 2015 edition of the Financial Stability Report issued by the Bank of England. Also see ‘Has corporate bond market liquidity fallen?’ https://bankunderground.co.uk/2015/08/27/has-corporate-bond-market-liquidity-fallen/ 12  All speeches are available online at www.bankofengland.co.uk/speeches  12  Our work here explores the depths of how open-ended funds, hedge funds, dealers, insurance companies, unit-linked funds and pension funds might, through responding separately to their incentives and constraints, together amplify market shocks. These are only simulations and the work is still at the development stage. None of the developments I have listed is conclusive of a problem but we have a duty to take the possibility seriously. With markets and funds having evolved so much, the absence of problems in the past is no guarantee for the future. There is enough here to be of concern not just to investors but also the wider economy and macroprudential authorities. I’ll allow you now to re-surface and decompress. But rest assured, we’ll be diving again to keep track of any new icebergs developing below the surface that could one day compromise the resilience of markets. Just as we’ll be working to ensure the moonwalking bears do not disrupt the wider economy.