A white paper released by the U.S. Treasury's Office of Financial Research provides heretofore unavailable data on Liquidity Funds, Short-Term Investment Funds, and Separately Managed Accounts, culled from the SEC's Form PF (Private Fund) data. The OFR paper identifies the size of the Liquidity Fund market at $288 billion, the STIF Fund market at $285 billion, and the Managed Account market at $359 billion. The paper, "Private Fund Data Shed Light on Liquidity Funds," written by David Johnson, says, "This brief analyzes for the first time a new confidential dataset collected by the Securities and Exchange Commission (SEC), the Form PF filings of liquidity funds. Like money market funds and banks' short-term investment funds, liquidity funds generally invest in short-term assets and have portfolios structured to meet investors' near-term liquidity needs. According to first quarter data, Form PF filers managed $288 billion in liquidity funds and an additional $359 billion in parallel managed accounts. In comparison with prime money market funds, liquidity funds hold assets with relatively longer maturities, have larger holdings of Treasury securities, and invest in a broader range of asset classes."

It continues, "This brief analyzes liquidity funds using the data filed on the SEC's new Form PF. As defined on the SEC's Form ADV, liquidity funds are private funds "that seek to generate income by investing in a portfolio of short-term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors." Liquidity funds, like other private funds, are open only to accredited investors and qualified purchasers (they are not available to retail investors) and are not required to abide by the rules governing mutual funds. Consequently, they may invest in riskier assets, engage in greater levels of liquidity transformation, or concentrate investments more in particular markets or securities than money market funds do. (Liquidity transformation involves using liquid assets, such as cash, to buy harder-to-sell assets, such as certain corporate bonds.) Liquidity funds are commonly used for purposes such as managing cash collateral from securities lending transactions or cash from operations. Potential risks associated with investing in liquidity funds are similar to those of other money funds, including credit, liquidity, and interest rate risks."

Further, OFR comments, "As of March 31, 2015, 42 liquidity funds had filed quarterly data and 20 funds filed annual data on Form PF. There are about $3 trillion managed in money market mutual funds and approximately $300 billion in short-term investment funds. In total, liquidity fund managers invested $646 billion on behalf of clients, including $288 billion in liquidity funds and $359 billion in parallel managed accounts. Parallel managed accounts are any managed accounts or other pools of assets managed by an adviser that pursues substantially the same investment objective and strategy and invests side-by-side in substantially the same positions as a private fund. Liquidity funds' largest investments include: U.S. Treasury securities (26 percent), bank certificates of deposit (CDs) (16 percent), unsecured commercial paper (15 percent), and U.S. Treasury and agency security repos (14 percent). Approximately half of the assets in liquidity funds have maturities of 30 days or less (31 percent of assets have maturities of 7 days or less and an additional 16 percent have maturities between 8 and 30 days) while the other half have maturities of 31 to 397 days. Less than 2 percent of assets have maturities longer than 397 days."

The paper explains, "A comparison of liquidity funds with prime money market funds shows that liquidity funds tend to hold securities with longer maturities. Although two-thirds of money market fund securities had final maturities of 30 days or less, only half of liquidity fund securities had this maturity profile. Again, assessing whether assets with longer maturities have less liquidity would require more detail on the securities in questions and analysis of the strength of secondary markets for those assets. Holdings in liquidity funds differ in significant ways from those in prime money market funds, which are money market funds that primarily invest in corporate debt securities. Liquidity funds tend to hold more Treasuries and have more investments in floating rate notes and other asset classes. Conversely, prime money market funds tend to have larger investments in CDs, unsecured commercial paper, and bonds issued by government agencies or government-sponsored enterprises (GSEs). The differences between the relative riskiness of these strategies is difficult to judge because of the lack of information on the specific security composition of liquidity fund holdings (liquidity funds are not currently required to disclose security-level information) and on fund counterparties, particularly for repo transactions."

Who invests in these funds? The OFR paper says, "Investors in liquidity funds tend to differ from typical money market fund investors. Money market funds' institutional and retail clients often include insurance companies, pension plans, and individual U.S. citizens. These sources only account for 6 percent of liquidity funds' assets under management. About 30 percent of liquidity fund assets are held by other private funds and 31 percent are held by investors outside the United States. About 16 percent of client assets are categorized as owned by "other" investors. Investor concentration in liquidity funds tends to be fairly high. Three-fifths of funds that file quarterly are at least 80 percent owned by their top five investors. Fifteen funds are completely owned by their top five investors and those investors held 60 percent of total fund shares."

Could Liquidity Funds pose a risk to financial stability? Johnson writes, "The main financial stability concern linked to liquidity funds is the possibility of runs, similar to those money market funds and certain local government investment pools experienced in 2008. The greater availability of data on liquidity funds, money market funds, and other money funds since 2008 has helped to reduce these risks by increasing the visibility of fund activities for investors and regulators. Liquidity funds have redemption structures comparable to money market funds. Liquidity transformation risks in liquidity funds overall do not appear to be significantly different from prime money market funds.... Individual liquidity funds, however, may exhibit greater liquidity transformation risks than average prime money market funds.... Investor concentration levels in many liquidity funds are relatively high."

On asset growth it continues, "Since the announcement of the new rules in July 2014, assets managed in liquidity funds and their parallel managed accounts have increased from $583 billion in June 2014 to $646 billion in March 2015. However, assets managed in money market funds increased more during that period, rising from $2.91 trillion to $3.01 trillion. Assets in prime funds declined from $1.8 trillion in December 2014 to $1.75 trillion in March 2015, probably attributable to tax-payment-related outflows."

Finally, the OFR report says, "In its July 2014 amendment to the money market fund rule, the SEC also included a provision aligning the reporting structures for liquidity funds on Form PF with the reporting structure for money market funds on Form N-MFP. This alignment, which will be effective in April 2016, will facilitate analysis of cash and liquidity management across short-term markets using combined data collected on Form N-MFP, Form PF, and the Office of the Comptroller of the Currency's Monthly Schedule of Short-Term Investment Funds. The OFR's analysis of new data on bilateral repo transactions, as outlined in the recent OFR brief, "Repo and Securities Lending: Improving Transparency with Better Data," may also help shed light on these short-term funding markets."

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