Why Do Mutual Funds Hold Cash?

57 Pages Posted: 27 Nov 2017 Last revised: 14 Oct 2018

See all articles by Maria Chaderina

Maria Chaderina

University of Oregon - Lundquist College of Business

Christoph Scheuch

wikifolio Financial Technologies AG

Date Written: October 9, 2018

Abstract

We examine the role of cash in a parsimonious model of active portfolio management with performance-driven capital flows and transaction costs. We argue that redemptions following bad performance pose no dilution risk to remaining investors and what appears to be liquidity management by mutual funds is managers collecting rent. Bad performance is a negative signal about a manager and reduces the optimal fund size. Liquidations of illiquid assets to satisfy performance-driven redemptions are efficient and do not justify regulatory interventions. Accommodating redemptions with cash only, as managers with performance-sensitive compensation do, amplifies outflows and destabilizes the fund.

Keywords: Mutual Fund, Performance, Liquidity Management, SEC Rule 22e-4

JEL Classification: D86, G23

Suggested Citation

Chaderina, Maria and Scheuch, Christoph, Why Do Mutual Funds Hold Cash? (October 9, 2018). Available at SSRN: https://ssrn.com/abstract=3075091 or http://dx.doi.org/10.2139/ssrn.3075091

Maria Chaderina (Contact Author)

University of Oregon - Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Christoph Scheuch

wikifolio Financial Technologies AG ( email )

Berggasse 31
Vienna, 1090
Austria

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
276
Abstract Views
1,624
Rank
207,753
PlumX Metrics