Real Estate Fund Flows and the Flow-Performance Relationship

Posted: 8 Apr 2016

See all articles by David H. Downs

David H. Downs

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate; The Kornblau Institute

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS)

Christian Weistroffer

European Central Bank (ECB)

René-Ojas Woltering

University of Regensburg - International Real Estate Business School (IREBS)

Date Written: April 5, 2016

Abstract

Convexity in the flow-performance relationship of traditional asset class mutual funds is widely documented, however, it cannot be assumed to hold for alternative asset classes. This paper addresses this shortcoming in the literature by examining the flow-performance relationship for real estate funds, specifically open-end, direct-property funds. This investment vehicle is designed to provide the risk-return benefits of private market real estate and is available to retail investors in many countries across the globe. An understanding of fund flow dynamics associated with this investment vehicle is of particular interest due to the liquidity risk associated with holding an inherently illiquid asset in an open-end structure. Our analysis draws on the theoretical foundations provided in the literature on mutual fund flows, performance chasing, liquidity risk, participation costs and dynamics across market cycles. We focus on German real estate funds from 1990 to 2010 as this is the largest market globally and there is a high level of confidence in the data. The results show that real estate fund investors chase past performance at the aggregate level and the relationship between flows and relative performance is asymmetric (i.e., convex) at the individual fund level. Fund-level liquidity risk tends to weaken convexity, while sensitivity increases with higher participation costs. We find the flow-performance relationship varies across time, though our interpretation is asset and investment vehicle specific. The implications are applicable to investors and fund managers of open-end, direct-property funds and, more broadly, other alternative asset funds where the underlying asset may not be liquid.

Keywords: Open-end real estate funds; Fund flows; Flow-performance relationship; Liquidity risk

Suggested Citation

Downs, David H. and Sebastian, Steffen P. and Weistroffer, Christian and Woltering, René-Ojas, Real Estate Fund Flows and the Flow-Performance Relationship (April 5, 2016). Journal of Real Estate Finance and Economics, Vol. 52, No. 4, 2016. Available at SSRN: https://ssrn.com/abstract=2759504

David H. Downs

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284-4000
United States

The Kornblau Institute ( email )

Richmond, VA 23284-4000
United States

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany
+49(941)943-5081 (Phone)
+49(941)943-5082 (Fax)

HOME PAGE: http://www.irebs.de

Christian Weistroffer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

René-Ojas Woltering (Contact Author)

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany

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