Over the past few decades, financial markets have delivered repeated reminders that financial purchases are never guaranteed. It may seem stable on paper, neatly embedded in models and stress tests, but in real-world situations, payments behave very differently. Adaptable, fragile and often disappear when needed most. Time and time again, analysts and portfolio managers have learned this lesson the hard way. However liquidity risk it is still considered a secondary concern after credit, market or operational risk. That hierarchy is getting old.
Take the latest and strongest examples that came in 2023, when several US banks—including Silicon Valley, Signature and First Republic—fell in succession. These institutions hold large amounts of long-term securities that appear safe under normal circumstances. But when treasury confidence evaporated and withdrawals accelerated, those assets could not be released quickly enough to meet obligations. What followed was a financial crisis that led to operational failure and infection throughout the financial system.
The lesson was clear: even well-funded institutions can fail when financial projections collapse. Despite this, liquidity risk is still modeled as something that “will happen” when things go wrong, rather than as a dynamic constraint that must be managed on a daily basis.
Warning indicators for monitoring
To reduce liquidity risk, institutions must abandon the idea that liquidity is a normal feature of markets. It is best understood as a living organism that requires constant monitoring and regular stress testing. Just as people evaluate life in general, portfolios require constant evaluation of money, especially in times of increased uncertainty. Today’s big environment makes this especially urgent. Markets are going through what many are describing as “the perfect storm.” Country conflicts, shifting alliances, sanctions, tariffs and political instability have brought constant friction to global financial flows. At the same time, interest rates remain high, making capital more expensive and reducing appetite. The combination has significantly reduced liquidity in all asset classes.
In this context, central bank policy, especially the decisions of the Federal Reserve, plays a major role. Although many market participants are waiting for a rate cut to restore easy financial conditions, the timing remains uncertain. When rates finally fall, capital will flow more freely and financing will be more accessible. But until then, paying money should be considered mandatory, not assumed.
Regulatory pressures complicate the picture. Banks and funds, especially private funds, operate under strict requirements. I Basel standards and similar bodies have increased capital and financial limits, limiting risk-taking and making it difficult to allocate capital to less liquid or high-risk sectors, including private markets. These rules may strengthen the stability of the system, but they may also reduce flexibility in times of stress.
Portfolio construction is evolving
Against this backdrop, portfolio managers must look both internally and externally. While capital situations may be out of control, internal portfolio construction is not. Reducing liquidity risk by depending on how portfolios are built, diversified and managed in real time. The good news here is that there is a growing availability of technology tools designed to improve liquidity management. Digital infrastructure is reshaping the way goods are accessed, sold and rented, providing ways to reduce revenue constraints.
A notable example is the rise of tokens. A growing share of goods, in particular real world goods (RWAs), represented digitally. US only, RWA token market exceeded 24 billion mid 2025. Tokenization allows previously illiquid assets to be broken down into smaller, tradable units. Instead of buying an entire physical asset, such as a commercial property or an apartment, investors can acquire fractions of tokens. This structure can significantly improve capital by lowering barriers to entry and allowing for slower exits. Although access to such products remains limited to professional and institutional investors, the model shows how technology can change credit characteristics without changing the underlying asset.
At the same time, the market infrastructure itself is changing. US markets are gradually moving to extended or 24/7 trading models. Greater trading availability can support liquidity by allowing transactions outside of normal market hours. However, this evolution introduces new complexities. Volatility can increase unexpectedly, and liquidity itself can fluctuate wildly in a very short period of time. Without proper risk management, extended trading can increase rather than decrease exposure.
The role of algorithms and AI
Another big change is the growing adoption of algorithmic trading and AI. These tools allow portfolio managers to move beyond single-position strategies and into dynamic, data-driven allocation models.
Algorithmic strategies can respond to market conditions faster than human decision-making alone, adjusting exposures and reallocating funds as currency conditions change. Rather than passively holding positions, portfolios can be continuously optimized based on pre-defined statistical parameters.
Many US consultants report that such tools are available improve their skills access to finance when it is most important. Although this technology is still developing—and requires careful governance to avoid unintended risks—it is already showing significant benefits in volatile or fragmented markets. Importantly, technology does not eliminate liquidity risk. But it offers greater visibility, faster response times and more granular control. When used responsibly, these tools help ensure that liquidity planning is effective rather than reactive.
A core lesson
Ultimately, the most important takeaway is simple but often overlooked: asset managers should not treat liquidity risk as a backup plan. It should be an active, central part of the portfolio strategy. History shows what happens when this principle is ignored. In times of market stress, when many participants need money at the same time, liquid assets disappear quickly. What once seemed easy to sell becomes impossible to exit without a huge loss. When liquidity evaporates, even rational portfolios can fail.
Asset managers who rely on outdated assumptions that money will always be there when needed risk repeating the same mistakes. In contrast, those who continue to test capital adequacy, embrace emerging technologies and adapt portfolio construction to current conditions are in the best position to withstand shocks.
As I always say, investment, like trust, takes years to build and seconds to lose. The challenge for today’s portfolio managers is to ensure that returns remain achievable when markets are under pressure. In times of uncertainty, the purchase of capital is the basis of stability.
Eugenia Mykuliak, Founder & CEO of B2PRIME Group, a global provider of financial services to institutional and professional clients.
