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Redemption in kind and mutual fund liquidity management

Author

Listed:
  • Agarwal, Vikas
  • Ren, Honglin
  • Shen, Ke
  • Zhao, Haibei

Abstract

Open-end mutual funds can use redemption in kind to satisfy investor redemptions by delivering securities instead of cash. We find that funds that reserve their rightsto redeem in kind experience less redemption after poor performance. Evidence from actual in-kind transactions reveals several unique mechanisms for redemption in kind to mitigate fund runs, including the delivery of more illiquid stocks and stocks with greater tax overhang.Funds also suffer less from the adverse impact of outflows on their performance.On the other hand, redeeming investors bear significant liquidation costs when they are forced to sell securities on their own.

Suggested Citation

  • Agarwal, Vikas & Ren, Honglin & Shen, Ke & Zhao, Haibei, 2021. "Redemption in kind and mutual fund liquidity management," CFR Working Papers 21-11, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:2111
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    File URL: https://www.econstor.eu/bitstream/10419/250747/1/1789988624.pdf
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    References listed on IDEAS

    as
    1. Vikas Agarwal & Haibei Zhao, 2019. "Interfund Lending in Mutual Fund Families: Role in Liquidity Management," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 4079-4115.
    2. Cremers, Martijn & Pareek, Ankur, 2016. "Patient capital outperformance: The investment skill of high active share managers who trade infrequently," Journal of Financial Economics, Elsevier, vol. 122(2), pages 288-306.
    3. Martijn Cremers & Ankur Pareek, 2015. "Short-Term Trading and Stock Return Anomalies: Momentum, Reversal, and Share Issuance," Review of Finance, European Finance Association, vol. 19(4), pages 1649-1701.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Lesmeister, Simon & Limbach, Peter & Rau, P. Raghavendra & Sonnenburg, Florian, 2022. "Indexing and the performance-flow relation of actively managed mutual funds," CFR Working Papers 22-02, University of Cologne, Centre for Financial Research (CFR).
    2. Ivanov, Ivan T. & Zimmermann, Tom & Heinrich, Nathan W., 2022. "Limits of disclosure regulation in the municipal bond market," CFR Working Papers 22-05, University of Cologne, Centre for Financial Research (CFR).

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    More about this item

    Keywords

    redemption in kind; mutual funds; liquidity management; financial fragility;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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