Asset managers are increasingly concerned about market liquidity and its effect on their investment strategies, according to research by State Street and the Alternative Investment Management Association (AIMA).

More than three-fifths of respondents reported that liquidity conditions have already impacted their investment strategies and are reassessing their risk management practices. One-fifth consider the effect to be significant.

Lou Maiuri, executive vice president and head of State Street’s Global Exchange and Global Markets, said: “Increased regulation and the pressure to manage costs have significantly changed market liquidity conditions.

“The new liquidity paradigm is causing many players in the investment industry to think again about the fundamentals: what roles they play, where they invest, and how they transact their business.”

State Street says new market entrants, electronic platforms and peer-to-peer lending are leading to less liquid trading conditions.

The loss of market liquidity has several practical and cost implications. 42% stated it is becoming more challenging to report liquidity positions to their board or regulators and 44% plan to invest to improve their risk–reporting capabilities.

The effect in investment strategies is even more pronounced. 53% of asset managers and owners plan to add more liquid investments to maintain exposures and 44% are increasing cash allocations against future liabilities or redemptions.

“With liquidity likely to remain top of mind for years to come, now is the time to find the strategies, tools, and solutions that will make a sustainable difference in the new investment climate,” added Maiuri.

There is no consensus among asset managers and owners about how the situation will be resolved. Almost half (49%) thought that non-bank institutions will increasingly become liquidity providers and 42% said this growth will come from hedge funds.

47% said that hedge funds may play an important role in providing liquidity in more volatile markets.

AIMA CEO Jack Inglis added: “Hedge funds and other asset managers are responding to more challenging market liquidity conditions by increasingly seeking out new opportunities, including taking on a more prominent role as market-makers, providing new sources of finance to the real economy, and lending their support and expertise to improving liquidity risk management.”

State Street commissioned Longitude Research to survey 150 pension funds, insurance companies and endowments and foundations and 150 asset managers (including 50 hedge funds) around the world.