The practice of investing open-ended funds in illiquid assets – eg land and buildings, infrastructure and unlisted securities – is the focus of a Financial Conduct Authority discussion paper seeking views on

  • the problems that can arise
  • how well current rules address them
  • what further regulatory intervention might be needed

Investing in illiquid assets can provide investors with benefits such as the potential to earn strong investment returns in the medium to long term and diversification of portfolio risk.

‘Illiquid assets and open-ended investment funds: DP17/1’ however, provides an opportunity for stakeholders to think about the management of risk, particularly around redemptions if investors are looking for a quick exit. 

Risks can be exacerbated if an event in the market triggers an upsurge in redemption demand or conditions change in the market for the underlying assets. This happened after the EU referendum vote on 23 June 2016, when liquidity management issues arose in some UK open-ended property funds.

When the market for the underlying assets is affected by sudden, severe changes in conditions, leading to price falls that are not fully reflected in fund valuations, some investors might be able to sell their holding for more than it is worth, disadvantaging the remaining investors in the fund.

The FCA will use feedback to help decide whether or not it needs to propose any changes to Handbook rules and guidance.