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* BoE's Cunliffe warns some funds may prove illiquid incrisis
* Says markets appear to have underprices risk ofilliquidity
By David Milliken
LONDON, July 17 (Reuters) - Investment funds focused onemerging economies or high-yield debt may be unable to returninvestors' money promptly if turmoil hits markets, the Bank ofEngland's financial stability chief warned on Thursday.
Many investment funds promise to redeem investors' shareswithin a day or two. But BoE Deputy Governor Jon Cunliffe saidthis may not be realistic when trouble strikes less liquidmarkets and droves of investors want to cut their losses.
"Market participants and investors will not always be ableto sell what they want, where they want, and when they want," Cunliffe told a conference hosted by the Financial ReportingCouncil, a body that promotes corporate governance standards.
He said markets appeared to have underpriced the risk ofinvestments proving illiquid, and that funds needed to haveclearer discussions with investors about whether it wasrealistic to redeem shares quickly under all circumstances.
Investment funds have up to now been seen as posing fewrisks to financial markets, because they usually do not borrowmoney and operate a range of strategies.
But Cunliffe - who is responsible for financial stability atthe BoE - said illiquidity was an issue in any market where asmall number of investment funds or hedge funds pre-dominated,and cited emerging markets and high-yield bonds as areas wherethis may be a problem.
"Investment funds can pose risks to financial stability.They very often offer same- or next-day redemptions despiteholding assets for which secondary-market liquidity can beuncertain," he said.
"(This) could disrupt systemically important markets."
Speculation last year that the Federal Reserve would slowthe pace at which it pumped money into the U.S. economy caused abrief rout in emerging market assets, and Cunliffe said it washard to predict what the consequences would be when globalmonetary policy started to tighten in earnest.
Some 4.5 trillion pounds ($7.7 trillion) of assets weremanaged in Britain at the end of 2012, according to theInvestment Management Association, an industry body. Blackrock, Legal & General, Prudential's M&G unitand State Street are major players. ($1 = 0.5844 British Pounds) (Reporting by David Milliken Editing by Jeremy Gaunt)