Open-end Fund Liquidity Risk Management Research

Open-end funds, a new vehicle in security market of China, combines the liquidity & convenience of current account and the high return of portfolio, which cause investors' general concern since they have been issued in September 2001. Open-end funds liquidity risk refers to the uncertainty that fund managers can redeem the portfolio at stable price in a given period when a large-scale withdrawal occurs, the extremes of which is quite similar to a run on the bank. Allowing for the developing security market and the inexperienced investors in China, fund managers have to weigh profitability of fund asset against liquidity involved, so as to reduce the loss of net fund value and to drop the possibility' of liquidity risk due to investors' withdrawal. These are the keys to the study of open-end fund liquidity risk.The article refers to both Vikaram's open-end funds liquidity risk management model and Blukers-Aulis'non-parameter model, also take into consideration the particularity of China security market. Through the fact that open-end funds suffered heavily from a large-scale withdrawal since the fourth quarter in 2002, it demonstrates the root cause of open-end funds liquidity risk, puts great emphasis on asset reservation in cash, stock portfolio liquidity and capital requirement in withdrawal, eventually raises some valuable advice to hedge liquidity risk.The article consists of five parts: the preface introduces the survey of open-end fund and the concept of liquidity risk; part one states the particularity and current situation of open-end fund; part two tells the open-end fund liquidity risk management model; part three says the verification of liquidity risk in brief; the end offers the conclusions and advice.We can draw these conclusions through the analysis in the article: (1) the conflict between profitability and liquidity is the root of open-end funds liquidity risk (2) the security market in China is still developing with lots of speculators (3 ) the continious and stable development of security market is the precondition of open-end fund .most of open-end funds are in the type of stock, whose performancedepends on stock market (4) so far, the merchanics in terms of block trade, processing trade, as well as derivatives of short sales and risk-hedging is still in progress, which restrict fund managers'competence to control risk and increase their stress in dealing with liquidity risk.