Via Knowledge@Wharton:
When a mutual fund hits a bump in the road, will investors quickly bail out?
The answer can be important to operators of open-end mutual funds, which allow investors to redeem their shares at the close of trading on any given day. When skittish stakeholders cash out, fund managers may have to conduct costly and unprofitable trades to quickly raise redemption capital.
In a paper titled, “Payoff Complementarities and Financial Fragility — Evidence from Mutual Fund Outflows,” Wharton finance professor Itay Goldstein and coauthors Qi Chen, from Duke University’s Fuqua School of Business, and Wei Jiang, from the Graduate School of Business at Columbia University, say the likelihood that fund investors will bolt is largely dependent on four factors: the past performance of the fund; the investors’ propensity to do what they expect other investors to do, a factor called “payoff complementarities”; the fund’s liquidity; and whether the fund’s investors are primarily individuals and other small stakeholders, or banks and other large institutional investors.
The bottom line to the research is that outflows from illiquid funds are more sensitive to bouts of bad performance compared with outflows from poorly performing liquid funds. Investors should keep this in mind when choosing a mutual fund in which to place their money. Risk-averse investors should be better suited to invest in liquid funds that can more easily meet future redemptions.
0 Response to “Patterns in Mutual Fund Redemptions”