Commodity Watch: Illusory liquidity

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" data-fr-image-pasted="true" src="/getContentAsset/e4db1c4c-2687-44cd-adbd-db1eb849e5d2/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.jpg?language=en" alt="Ahmad Al Sati" title="Ahmad Al Sati" class="fr-fic fr-dii" style="width: 180px"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>Liquidity is a funny thing. It’s usually available when portfolios are going swimmingly- when gates are open and prices are high. Liquidity is generally a non-issue when investors don’t need it or are not thinking about it. But, when it is needed most, it can be a mirage.</p><p>Building liquidity in a portfolio is key for both individual and institutional investors. It allows investors to pay for their various obligations (helping a child buy a home, paying pensioners’ benefits, meeting capital calls). It also allows investors to manage market dislocations or investment paradigm shifts and to participate in new opportunities. Without it, investors must sell assets at inopportune times. A Cambridge Associates study found that a three-year downturn in the market can burn through a portfolio’s allocation of public equities (even as high as 45%). During times of stress, the proportion of private’s balloons because, rain or shine, private equity, venture capital and private credit capital calls keep on coming.</p><p>To be effective liquidity must address both sudden events when markets cease to function (2008/09 financial crisis) as well as long term illiquidity that is part and parcel of many alternative asset vehicles. The first type is seared into memories and looms large in thinking but tends to be infrequent and difficult to predict (a pandemic happens every century). The more insidious form of illiquidity is perhaps the long-term locked up capital that an investor sees in statements, but cannot access, use or reallocate. Managing that illiquidity is as important as preparing for the once in a generation meltdown if not as glamorous - few best sellers will be written about it.</p><p>Diversification helps, a diversified portfolio should weather crises better as uncorrelated assets continue to drive returns even as asset correlations move to one. Diversification also helps because uncorrelated assets have their own durations, market dynamics and liquidity profiles. Shorter duration credit, for example, can allow investors to recycle capital to optimal opportunities in times of stress.</p><p>Income is key, income, is cash and cash can be used to meet all the aforementioned obligations. Stable cash flows from uncorrelated assets can also ameliorate some of the liquidity constraints in times of stress and when other distributions from traditional alts are sparse.</p><p>Wrappers matter. Built-in contractual exits that are difficult to circumvent can help investors get their capital when they need it (e.g., interval funds are regulatorily required to buy back shares- it’s not optional). A wrapper, however, is only as effective as the underlying strategy. A mismatched strategy equates to limited liquidity.</p><p>Today, LPs are spoiled for choice with product. Yet, increased allocations to locked up alts may mean that liquidity will be at a premium. Embedding true liquid alts into a portfolio can help balance it and help clients meet the everyday need for cash.</p>