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For years, liquidity was treated as a simple box to check. If a fund allowed daily redemptions or the assets traded on major exchanges, it was considered liquid. But today’s markets have made it painfully clear that this point of view is no longer viable.
In 2025, liquidity is not a background variable — it's a front-line risk factor, one that’s being tested repeatedly as global markets navigate a web of geopolitical uncertainty and macroeconomic signals. The financial system is being pulled in multiple directions, often with unpredictable consequences for funding markets and asset valuations.
In this new landscape, market participants can no longer rely on lockups and redemption terms as adequate proxies for liquidity. What really matters is whether assets can be sold at scale without disrupting prices or setting off a broader panic.
The Fragile Nature of Liquidity
We have seen several examples of this fragility by now.
The U.S. Treasury market, traditionally considered the most liquid in the world, has experienced increased fragility since hedge fund “basis trades” strategies have grown to the point of threatening systemic stability. This April, concerns over inflation and erratic government policies led to a sell-off in Treasuries, triggering the unwinding of these leveraged positions and amplifying market volatility, leaving it susceptible to shocks.
This market's overall vulnerability had already been pointed out by the U.S. Federal Reserve in the past. In its 2023 Financial Stability Report, the Fed covers a number of concerns regarding the Treasury market’s liquidity, warning of its potential to pose systemic risks — particularly, if liquidity conditions deteriorate during times of stress.
Before that, back in 2022, we saw how the U.K. pension funds employing liability-driven investment (LDI) strategies were hit with margin calls on gilt positions. The sudden need to post additional collateral led to a rapid sell-off of gilts, causing a sharp decline in their prices. The situation was severe enough that the Bank of England had to step in to restore stability.
Even the crypto sector showed its fragility when major stablecoins and exchanges collapsed, draining liquidity faster than anyone could blink. For instance, the notorious bankruptcy of FTX led to a major loss of confidence in the crypto market, causing a sharp decline in cryptocurrency prices. However, it also had spillover effects on traditional financial markets, as investors reassessed risk and liquidity across asset classes.
In all these cases, a common theme emerges: Liquidity conditions are deeply tied to financial cycles. Research from the Bank for International Settlements highlights how downturns often coincide with sharp contractions in market liquidity, magnifying volatility and losses. This cyclicality means that liquidity risk isn’t static — it rises and falls with macroeconomic conditions, investor positioning, risk appetite, and leverage.
When liquidity can evaporate at tremendous speeds, updated risk management frameworks and constant monitoring are essential to ensure adjustments can be made in time and worst outcomes avoided.
How Can Smart Players Adapt?
In this new environment, we need to redefine what we mean by liquidity. It’s no longer just about redemption frequency or average daily trading volume. It’s about market depth, access to funding, and the ability to exit positions when it matters most.
So how can institutions prepare and position themselves? The most important thing to do here — to my mind — is to embrace liquidity as a dynamic concept, rather than a static one.
For hedge funds, a sensible thing to do would be to dial down leverage. Holding more cash and repo-eligible collateral as a buffer can offer greater flexibility when the funding tightens. Another thing they can do is employ liquidity-at-risk models to better understand what can be sold without sparking fire sales.
Quant funds and CTAs should consider embedding liquidity signals directly into their execution logic, enabling their systems to slow or reroute trades when market depth begins to dry up. As algorithmic trading becomes more reactive to news and sentiment shifts, it's also wise to build in safeguards that help avoid the risk of cascading AI-driven selloffs.
Notably, regulators like the SEC have introduced reforms aimed at curbing short-term trading and protecting fund liquidity. One such rule now allows open-end funds to impose redemption fees (up to 2%) to offset transaction costs caused by rapid inflows and outflows. The SEC has also mandated greater transparency from intermediaries, requiring them to share investor data to help funds monitor trading behaviors and manage redemption risk more proactively.
For asset managers, one key step is to restructure their portfolios into liquidation tiers. Grouping assets into categories like T+1 or T+5 — based on how quickly different assets can be liquidated — would help them plan exits more realistically. And to better manage investor flows during periods of stress, managers should also look at integrating tools such as swing pricing or redemption gates, which can help cushion the impact of large, sudden withdrawals.
The key theme here is preparation. Enterprise risk teams are now building cross-asset dashboards and “liquidity playbooks” designed for real-time use. This isn’t just about monitoring metrics — it’s about being ready to act instantly when the market turns.
Central Banks Won’t Help With Everything
Regulators are catching up to the changing market. We’re seeing stronger oversight of non-bank financial institutions (NBFIs), tightening of fund liquidity rules, and more stress tests across the board. But while central banks will intervene in moments of systemic risk, they won’t stop individual fund losses. Counting on unlimited rescue is not a strategy; it’s a risk.
At the same time, divergent global policies mean that liquidity conditions will shift across borders. The Fed’s easing might clash with tightening in Europe or Japan — creating carry-trade imbalances and FX shocks, and making cross-border flows that much more fragile.
Key Takeaways for 2025
If there’s one core message to leave here, it’s this: Liquidity is not something you think about after the crisis. It’s something you build for before it starts.
Whether you’re running an alternatives fund, managing a multi-asset portfolio, or advising clients on capital allocation, every institution needs to understand the exit plan behind every strategy.
Cash buffers should be built before they’re needed, not during a selloff. Stress testing needs to be constant, because in the digital age, warning signs don’t come with advance notice. Don’t assume you’ll have time to react. And most of all, don’t think of liquidity as static. It’s as dynamic as the markets themselves.
Ultimately, the firms that endure and find success in 2025 won’t just be the ones that made the right asset calls. They’ll be the ones that stayed mobile when the market froze. Liquidity is a strategic edge — use it.
Eugenia Mykuliak is the founder & executive director at B2PRIME Group, a global financial services provider for institutional and professional clients.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
