A Survey of Institutional Investors’ Investment and Management Decisions on Illiquid Assets
This paper reports the results of a survey of nine Dutch and five Canadian pension funds and fiduciary managers on the investment and management decisions regarding illiquid assets. The six Dutch pension funds in our survey represent total assets under management of EUR 342 billion and the four Canadian pension funds amount to CAD 203 billion. Dutch pension funds invest on average 14% of their portfolio in illiquid assets; for Canadian funds this equals 34%. The main reasons reported most often for investing in illiquid assets are the risk-return trade-off and the diversification benefits. Dutch pension funds generally use asset liability management studies to determine the allocation to illiquid assets, while Canadian pension funds may deviate from target allocations depending on a specified target return for illiquid assets. Pension funds in both countries apply upper limits to the percentage of funds invested in illiquid assets. Most survey participants have liquidity management policies to free up cash if necessary, such as maintaining a cash buffer, using the repo market or securities lending, and applying a specific sequence in which to liquidate positions. Many survey participants perform liquidity stress tests. We have formulated four best practices based on the results of the survey.