Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds

We study liquidity transformation in mutual funds using a novel data set on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds’ cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.

Keywords: liquidity transformation, asset management, mutual funds, cash holdings, fire sales

JEL Classification: G23

Suggested Citation: Suggested Citation

Chernenko, Sergey and Sunderam, Adi, Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds (July 15, 2016). Fisher College of Business Working Paper No. 2016-03-05, Charles A. Dice Center Working Paper No. 2016-5, Available at SSRN: https://ssrn.com/abstract=2733294 or http://dx.doi.org/10.2139/ssrn.2733294