The crisis sparked by the mini-Budget (23 September) may have calmed for now thanks to the intervention of new chancellor Jeremy Hunt but the issues raised by this episode have not gone away.

As is often the case during periods of market stress previously obscure areas come into focus and that’s been the case with LDIs (liability-driven investment policies) held by defined benefit pension schemes. The rapid surge in gilt yields which followed former chancellor Kwasi Kwarteng’s fiscal plans should, in theory, have reduced the size of pension schemes’ liabilities.

However, the widely held LDIs, instruments bought from investment banks to cancel out the risk associated with gilt yield movements, meant the rapid sell-off in government bonds saw them scrambling for cash to cover these positions.

According to the pensions consultants XPS, every 0.5 percentage point rise in long-dated gilt yields would require pension funds to come up with another £70 billion of collateral just to maintain their LDI positions.

Finding that collateral means selling what liquid assets they have, and this creates problems of its own and prompted a Bank of England intervention in the gilt market to maintain market stability. It also illustrates a wider point about the impact of redemptions on funds themselves and the wider markets.

So-called open-ended funds expand and contract in size based on investor inflows and outflows. A flood of outflows means they have to sell assets in order to return cash to investors.

A recent blog post by the International Monetary Fund highlighted why this can be a problem. ‘Open-end investment funds, as they are known, have grown significantly in the past two decades, with $41 trillion in assets globally this year,’ it noted. ‘That represents about one-fifth of the nonbank financial sector’s holdings.

‘Pressures from these investor runs could force funds to sell assets quickly, which would further depress valuations. That in turn would amplify the impact of the initial shock and potentially undermine the stability of the financial system.’

This is a particular issue with funds which invest in illiquid assets like, for example, property which can’t be bought or sold in a short timeframe. Trading in property funds has been suspended during previous periods of volatility and Columbia Threadneedle has already suspended its UK property fund this time round.

But more generally, funds may feel the need to sell assets which have outperformed this year rather than sell stuff which has bottomed out and this could inflict further pain on stocks too.

Notably, and despite any company or industry-specific negative news, pharmaceutical firm AstraZeneca (AZN) has retreated sharply from all-time highs above £115 in late August. As of 17 October its shares were down 14.5% from this record level compared with an 8.2% fall for the FTSE All-Share, despite AstraZeneca enjoying clear defensive qualities. 

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