The Science and Art of Risk Management: Liquidity Risk - Title Image

The Science and Art of Risk Management: Liquidity Risk

Good risk management leads to good decision making.

November 08, 2019


Report Highlights

  • In fixed income, the compensation for taking different risks is reflected in additional spread over the risk-free benchmark.
  • Searching for value outside traditional benchmarks can uncover investments that offer attractive returns with low correlations and limited duration and credit risk. Identifying suitable investments outside traditional benchmarks requires a careful analysis of instrument liquidity.
  • It is important to understand how buyers and sellers will react in different market environments. As volatility rises liquidity can evaporate for short periods across many sectors, including those that are perceived to be more liquid.
  • In our system, we classify securities into over 1,400 different liquidity groups that are broken down by sector, rating, original issue size, duration, and more.
  • After classifying individual asset class investments into specific liquidity groups and producing various liquidity curves, we perform liquidity risk assessments for every portfolio we manage and determine whether any changes need to be made in the management of its liquidity risk.
Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author or speaker, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.

Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

Read a fund’s prospectus and summary prospectus (if available) carefully before investing. It contains the fund’s investment objectives, risks, charges, expenses and other information, which should be considered carefully before investing. Obtain a prospectus and summary prospectus (if available) at GuggenheimInvestments.com or call 800.820.0888.

©2019 Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC. The information contained herein is confidential and may not be reproduced in whole or in part. GPIM 40135

 


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