Could 'Liquidity Options' Stand In for Cash In a Financial Pinch?

Could “liquidity options” stand in for cash and liquid securities in a financial pinch? Professionals Maxim Golts and Mark Kritzman note in II’s fall Journal of Derivatives that “many investors, especially endowments and foundations, have committed a substantial fraction of their wealth to illiquid investments, such as hedge funds” and that this shift presented “considerable challenges as they faced unanticipated capital calls in the recent global financial crisis.

” They argue that “it may be more efficient to purchase liquidity options, which would be favorably priced if the investor’s perceived likelihood of a liquidity event is sufficiently higher than the market’s.” After suggesting how to structure and price such options, they conclude that “although liquidity options may not be suitable for all circumstances, we believe they can be an attractive alternative to cash reserves, especially when the broad market has not yet discounted an impending shift to financial turbulence.”