Research On The Liquidity Risk Of Open-ended Fund

China Securities Regulatory Commission has permitted the issue of the first open-end fund Hua An Innovations on Sep. 4th 2001. Nowadays, there are over two hundred open-end funds in China. From five years stock market slump to today's booming development, open-end funds have also experienced a large number of redemption. In particular, under recent 10 billion scales, and overheated investment enthusiasm, liquidity risk of open-end funds also exposed greatly.This article has five parts. The first part introduced the definition of liquidity risk and classifications of open-end funds. It also analyzed the different characteristics of different open-end funds. The second part introduced five historical redemptions in China since 2001, which revealed the market phenomenon that caused liquidity risk. The third part focuses on the special conditions in China. The last part analyzes the efficient ways to control and reduce the liquidity risk from outside and inside the fund management companies.There are diverse reasons cause China's open-end fund liquidity risks. On one hand, due to the different investment targets, Equity Fund s'net value are closely related to the stock market. Fluctuations in the stock market have also become the main causes of Equity Fund liquidity risk.More than 50% of the assets of Bond-fund are invested in the bond market, thereby its value is affected by the prices of bonds; Interest increase policy will bring enormous redemption risk. Because of their volatility with the stock market, Currency Fund has the characteristics of low-income. Institutional investors often hold currency fund during the bear market to avoid risks and during the bull market and issuing new shares, the currency bond will be sold a lot and investors will enter into stock market directly. This huge withdrawal of currency fund impact was enormous, if there is no good asset allocation, the damage will be huge.On the other hand, China's special conditions also gave special causes to open-end fund liquidity risks. First, over 95% funds of China's open-end fund come from individual investors, coupled with investors'"buy low sell high" "loathe the old" investment philosophy, the long-term investment instruments fund becomes short-term profit-making tools. And the market trading system is not perfect and lacks of options, futures and other financial derivatives to avoid the risk of stock market. Investors and Fund Company will face greater risk of foreclosure during the bear market. China's stock market is also affected by the policy very seriously, investors often played up the news. Moreover, the Chinese securities market, the currency market was divided, Fund companies cannot make use of short-term money market financing, to control large redemption risk.Since the first open-end fund issue, there are 5th redemption, which also reveals more profound form of market phenomena causing open-end fund liquidity risk. In 2002, the open-end fund market was just established, in order to expand the size, many funds only attract institutional investors, and do not distinguish between investor by their liquidity preference. Under such single structure, institutional investors large size redemption will cause fund scale reduced significantly, which suffered huge losses. In 2003, as the Fund's growth, more and more retail investors join in fund market and occupy a dominant position. Due to the lack of awareness of the fund market, they all use the concept of stock investment. Therefore, when the downturn in the stock market beginning to pick up and funds become slightly profitable, there will be redemption, lead to a number of funds net losses. In 2005, the insurance industry can directly invest in the stock market, coupled with the gradual recovery of the stock market and fund companies high fees, many insurance companies choose to invest by themselves. With the establishment of its own asset management company, the redemption becomes more noticeable in 2006. The currency and bond funds also bare the large redemptions of fund by the institutional investors were shares considerable profit in 2006. 2007 stock market turbulence was the reasons for withdrawal.To prevent an open-end fund liquidity risks, we need to perfect theopen-end fund external investment environment. This includes the establishment of external supervision by the regulatory agencies to formulate relevant laws and regulations to control risk, establishing early warning mechanisms to avoid risks; the development of financial derivatives and training investors to have reasonable investment philosophy are also crucial. Secondly, fund companies have to do the internal control for liquidity risk and establish a sound internal control system. On the other hand, fund managers should also improve the distribution of the assets, customer management, and ongoing customer marketing, such as the development of different products, rates and the redemption period to meet their different liquidity preference. Resolution adopted by the Fund and dividends to reduce the net value of the Fund, can be effective in avoiding large redemption.