Superannuation funds should examine derivatives to maintain desired asset allocation and provide liquidity to members as needed, according to Queensland Investment Corporation (QIC).
"Funds are facing increasing liquidity issues caused by a range of factors, including increased member movement into defensive investment strategy options and the need for funds to maintain hedging positions," QIC managing director of capital markets Troy Rieck said.
Liquidity issues are becoming an industry-wide problem, having already affected the fund-of-hedge-funds sector and also superannuation funds.
"Derivatives should be investigated as an effective way of managing desired market exposures, while retaining flexibility to provide liquidity as required," Rieck said.
Superannuation funds have also gotten themselves into trouble through the fact that their unlisted assets or alternative investments are very cash thirsty, he said.
"In an environment where your listed equity markets, which is a big chunk of exposures for most funds, fall significantly ... the unlisted exposure starts to become a larger part of the funds' allocations," he said.
Funds should also add a frequent rebalancing program in order to protect themselves from the risk of markets becoming highly illiquid around month-end trading days, he said.
"This allows funds to benefit from equity and bond market volatility, as they tend to be buying when markets are falling and selling as they rise."
