AssetUnderManagement usually refers to fund management (mutual funds, hedge funds), but in this blog, it also means “fund under custody”

Q1: how much risk (including liquidity risk) is accepted by the depositor?

— eg: AUM by FTX .. depositors’ fund should stay in some custodian account, but FTX transferred part of it to some affiliate company.
A1: zero risk. Depositors don’t want and don’t agree to take on any risk. They want to have real time access to their funds, with no question asked.

— eg: AUM by land lord = rent deposits .. landlord ought to keep tenant’s security deposit in a custodian account. Owner of the fund is the tenant not the landlord.
A1: liquidity constraints. Depositor (tenant) can only demand their money after they move out.

— eg: AUM by CPF = members’ money.. CPFB should not invest members’ money in risky schemes. CPFB invests it with  GIC rather than keeping it in some custodian account.
A1: severe liquidity restrictions. CPF members can only withdraw for specific purposes or at some specific age. A.k.a compulsory saving.

Many pension funds are similar.

— eg: AUM by retail bank = your deposits .. your deposit amount=bank’s risk capital #ownership
A1: zero risk for savings accounts, and some small liquidity risk for time-deposits. If a bank uses depositor’s money recklessly, depositors would queue up to withdraw, causing a run on the bank.

— eg: AUM by husband = wife’s money under my care. She wants to feel confident and reassured that her money is not invested in anything illiquid.
A1: my wife may feel she is taking on too much liquidity risk when she lets me manage her money. She often wants more liquidity.