HKSI Paper 12 The investment management process question: Tai Po General Insurance Ltd's investment fund backs property claims

Answer: C. Keep part of the fund in cash and short-dated high-quality bonds, and limit its holdings of illiquid assets

A liquidity constraint arises when the client may need cash at short notice. Sudden typhoon claims mean the insurer must raise money quickly without large losses, so part of the fund should sit in cash and short-dated, high-quality bonds, and illiquid assets should be limited. A bond ladder with an average maturity of about 12 years releases only a small slice each year, and long bonds sold early can fall in price when rates rise. Blue-chip shares trade daily, but their prices are volatile, so a forced sale after a market fall can raise far less than the claims. Private credit loans pay regular coupons, but steady income is not liquidity: the loans cannot be sold quickly at a fair price. Source: Standard investment management process (planning, execution and feedback); investment policy statement practice (as at October 2026).