Maslov, the famous psychologist already said it in 1966: "I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."
Today the IMF published a survey they conducted on plain vanilla asset management world wide.
The industry grows rapidly (AUM already exceeds total GDP world wide), which forces funds to buy less liquid products. Pair that with an unwillingness on the banking side to be market makers and the fact that in advanced economies, the funds have chosen similar directions and the result is clear. If a large scale event occurs, liquidity dries up and investors cause a 'run' on certain products. And that could be a potential systemic risk.
Here is the nail part. The IMF calls for more oversight, better risk management etc, etc. That sounds like the same thing that is causing this potential drying up of liquidity. The creation of more and more restrictions and regulation is causing the unwillingness of banks to be market makers. Moreover, since the mantra in the investment world is 'risk aversion' you can expect that overall investment companies are moving in the same direction and the same products. Risk aversion is killing diversity and now seems to create its own new risks.
In addition to more oversight, the IMF argues that funds should also look at making redemption more difficult. In other words, making it more difficult for investors to exit. Which will probably create its own new set of additonal risk.
Read the full article here