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nothing would prevent a sophisticated investor in the omnibus fund from manipulating correlation further down with derivatives as hedge funds do. Liquidity, Risk and Return Demand deposits in banks today can be withdrawn at any time. Time deposits cannot be attracted without either competitive interest or quick liquidity. This liquidity requirement has been awkward in that bank deposits are usually reloaned for years. Arun on the bank soon finds no cash left to meet withdrawals. The runs come when the high winds blow, and provide a coup de grace on top of high default rates. The omnibus fund meets withdrawals easily because it is invested only in the most liquid securities. ETFs trade in seconds at current market quotations. Any mutual fund shares that might belong to the portfolio trade at current close. Like most funds, the omnibus fund would also maintain cash. Like some others, it would “equitize” its cash by exposing it to swaps or futures. Equitized cash leaves a fund fully invested in effect, while adding instant liquidity around the clock. ETFs give instant liquidity, but only during trading hours. Mutual funds typically trade at market close only. A risk-averse investor in the omnibus fund who opts for Libor plus so many basis points is more or less in the same position as a bank depositor today. She knows that her account will grow only by deposits and by interest (Libor plus basis points) left in to compound. She knows that it will decline only by withdrawals. The investor who prefers the long leg in swaps or futures, or stays unhedged, will also see her account rise and fall with the market. There are infinite graduations around these three simple choices. An account might be partly hedged and partly exposed, or even over-exposed to a notional amount larger than the account size where law and markets permit. (They usually do.) Chapter 8 Banks, Money and Macroeconomics 2/8/16 6 HOUSE_OVERSIGHT_011095