EU watchdog warns fund investors over cash back promises

[January 10, 2020]  By Huw Jones

LONDON (Reuters) - The European Union's markets watchdog warned retail investors on Friday about putting cash into funds that may not be able to meet promises on refunds.

Chair of European Securities and Markets Steven Maijoor speaks at a European Financial Forum event in Dublin, Ireland February 13, 2019. REUTERS/Clodagh Kilcoyne/File Photo

The European Securities and Markets Authority (ESMA) said funds of funds and real estate funds have the highest percentage of retail investors, 31% and 21%, respectively, in the overall alternative investments sector.

Many funds in the 739 billion euro ($819.70 billion) real estate subgroup offer investors their money back on a daily basis, indicating a "structural vulnerability risk" as property is an illiquid asset, meaning it cannot be sold at such short notice, ESMA said in its annual report on alternative investments.

This part of the market grew by 35% from 2017.

For the 840 billion euro funds of funds subgroup there is a "mismatch" in liquidity, as 35% of the net asset value is redeemable within a day, while only 24% of assets can be liquidated within that timeframe, ESMA said.

"These risks should be considered by investors when making their investment decisions," ESMA Chair Steven Maijoor said. (Graphic: ESMA Liquidity click, https://fingfx.thomsonreuters.com/
gfx/mkt/13/868/866/ESMALIQ2.png)

So-called liquidity mismatches in funds came to the fore in Britain when several property funds suspended redemptions because they could not sell real estate fast enough to meet requests from investors for their money back.

A property fund run by M&G in Britain was suspended in December due to market uncertainty ahead of Brexit.

A UK equities fund run by former star stock picker Neil Woodford has been closed after it was unable to sell illiquid assets to meet redemption demands, trapping hundreds of thousands of investors, prompting the Bank of England to look for changes.

ESMA said the EU's alternative funds sector grew 11% to 5.8 trillion euros in 2018.

The sector also includes 333 billion euros in hedge funds and 352 billion euros of private equity, and mainly attracts professional investors, and accounts for 40% of the EU's funds industry.

(Graphic: Real Estate Liquidity click, https://fingfx.thomsonreuters.com/
gfx/mkt/13/867/865/esmaLIQ.png)

(Reporting by Huw Jones, editing by Louise Heavens)

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