Liquidity Lens

Liquidity is emerging as a strategic priority for asset owners navigating today’s evolving investment landscape. As part of Northern Trust’s 2025 Asset Owners in Focus global study, we surveyed 180 institutions across geographies to better understand how they’re approaching liquidity and cash allocations within their broader investment and operational frameworks.

The findings reveal a clear shift: 60% of respondents say liquidity management has grown more important to their strategies over the past year, driven by factors like the interest rate environment, changing risk profiles, and the pursuit of higher returns. As cash management needs become more complex, defining a clear liquidity strategy— and equipping it with the right resources—is essential for aligning short-term needs with long-term goals.

Asset owners’ approach to liquidity

In our study, several key themes emerged around asset owners’ approach to liquidity and cash allocations— including why liquidity is growing in importance, how asset owners are achieving that additional liquidity, and how they’re investing to support their cash management efforts.

• Supporting private markets allocations

According to our study, 60% of asset owners say liquidity management has become more important to their investment strategies in the past year. What’s driving that increased importance? Interest rates (75%), higher returns (44%), and risk strategy (43%) changes emerged as the top reasons.

Increased reliance on certain asset classes and investment vehicles is also likely driving asset owners’ closer eye to liquidity management. Private markets are one such example. Our study shows that the average asset owner now allocates 13% of their portfolio to private markets—a figure that continues to rise as institutions seek diversification and higher returns in a low-yield environment.

While these investments offer compelling long-term value, they also introduce structural liquidity challenges that must be actively managed. With extended lock-up periods, infrequent valuation cycles, and limited redemption options inherent to private markets investments, these characteristics reduce the overall liquidity profile of the portfolio and can create timing mismatches between capital calls and available cash.

In periods of market stress or delayed distributions, asset owners may find themselves needing to raise liquidity quickly, which can lead to suboptimal decisions such as selling public assets at depressed prices or drawing on credit lines.

• Supporting derivatives use

Derivatives are another asset class with stringent liquidity requirements, and just like private markets, their use continues to grow. Our study shows that 44% of asset owners employ derivatives in their investment strategy. According to a 2025 report by the International Swaps and Derivatives Association (ISDA), 87.1% of companies across seven major equity indices—including pension funds and insurance firms—use derivatives to manage risk, liquidity, and enhance returns. This includes 90% of financial institutions.

While derivatives are useful tools when it comes to currency hedging, downside protection, and dynamic asset allocation, they carry intense liquidity needs when it comes to meeting collateral calls. To mitigate these liquidity risks, asset owners are increasingly adjusting their cash holdings and adopting more sophisticated liquidity frameworks.

• Growing cash holdings

As a result of this increased focus on liquidity, our data shows that asset owners are taking action around their cash management strategies. Half of respondents said they were increasing their cash allocations, and 63% said they are amping up investment in lower-risk short-term cash vehicles—a sign that many have an eye on their liquidity strategy, selecting vehicles that can provide a competitive return but still offer accessible liquidity.

• Eyeing technology to support liquidity needs

Our survey found that asset owners are also looking to technology for assistance in their liquidity strategies. Thirty percent are planning to spend more on technology that will help monitor and execute on cash and liquidity management.

Technology can streamline cash management tracking by integrating real-time data across accounts, enabling asset owners to maintain accurate visibility into their liquidity positions. Advanced analytics and automation tools also help forecast future cash needs and optimize liquidity buffers, reducing the risk of shortfalls. The industry-wide embrace of AI can further enhance liquidity management by identifying patterns in cash flow data, enabling predictive insights and faster decision-making across complex portfolios.

Cash allocation strategy

Asset owners have to contend with uncertain market conditions and appropriately balance their liquidity strategy to deliver optimized returns in elevated risk scenarios. As highlighted in our survey, increased cash allocation is being driven by several factors:

• Macro uncertainty

Geopolitical tensions, tariff regimes, and fiscal activism are creating unpredictable macroeconomic conditions. Cash provides optionality and flexibility in such volatile environments, allowing asset owners to respond quickly to market dislocations or policy shifts.

• Attractive yields

Although interest rates have started to decline, they are still higher than historical averages. Holding cash is no longer a drag on performance; it can be a yield-generating asset class with lower risk.

• Risk management and resilience

Cash enhances portfolio resilience, supports capital preservation, and enables tactical reallocation during market stress. It also provides the ability to invest in emerging opportunities through the economic cycle.

While cash has historically been viewed as a low-return buffer, the current environment redefines its role:

• Yield-enhancing in the short term
• Risk-mitigating in volatile markets
• Strategically enabling for future investments

Refining a liquidity strategy

Asset owners face an increasingly complex asset management landscape. For corporates, for example, Northern Trust Asset Management’s recent Global Treasury Investments Survey found that 22% of treasurers note liquidity as their number one concern.

Challenges in today’s environment make it essential to define a clear liquidity and cash management strategy. To do this successfully, asset owners must seek out the right resources—whether that’s specialized platforms, expert partners, or tailored investment vehicles—that can provide transparency, flexibility, and control, including the following liquidity solutions:

• Flexible deposit options – A custody partner should offer a variety of deposit structures designed to align with your liquidity timelines and investment goals.
• Cash and collateral management services – As collateral becomes an increasingly critical component of risk and liquidity management, integrated cash and collateral solutions help institutions navigate regulatory demands while maintaining operational agility.
• Cash sweeps – Automated cash sweep programs play a critical role in institutional liquidity strategies, helping ensure excess cash is systematically deployed into short-term investments that align with risk and return parameters.
• Term deposits – In a declining rate environment, fixed term deposits can lock in returns over selected tenors and reduce exposure to market rate volatility.
• Securities lending – Securities lending is increasingly viewed not just as a returns enhancer, but as a strategic component of portfolio management—requiring thoughtful consideration of counterparty risk, transparency, and governance.
• FICC repo – Leveraging the FICC repo market allows institutions to access centralized clearing and robust risk management frameworks, which are essential in today’s complex and interconnected funding environment.

Engaging with experienced providers can help asset owners navigate regulatory shifts, optimize returns, and maintain resilience across market cycles.

Looking forward at liquidity’s role

Asset owners by and large agree that liquidity deserves extra attention in today’s environment. Those who take a proactive approach to liquidity management are better positioned to optimize returns, mitigate risk, and respond to market shifts with agility. By leveraging integrated solutions that optimize cash holdings, diversify counterparty exposure, and automate investment flows, institutions can unlock efficiencies across their portfolios.

Backed by strong balance sheets and robust infrastructure, providers like Northern Trust offer the scale and stability needed to support this evolution—helping asset owners turn liquidity into a source of strength, not stress.

Interested in learning how treasurers are navigating liquidity, technology, and market volatility? Download the Global Treasury Investments Survey 2025 from Northern Trust Asset Management to explore key trends, data, and expert perspectives shaping short-term investment strategies.