Stale Prices, Fragility, and Detrimental Cash: Evidence from Private Real Estate Funds

Abstract

This paper documents a new source of financial fragility and studies its interactions with common stabilization tools. Economists believe funds report stale Net Asset Values (NAVs) when they invest in illiquid assets. This staleness creates return predictability, NAV-timing risks, and fund fragility risks for open-end funds. However, because their assets are illiquid, managers limit fund flows to deter buying assets at a premium or selling them at a discount. Limiting flows has the secondary effect of protecting against the risks stale NAVs create. Interestingly, illiquidity in the underlying assets creates the opportunity for, and the friction against, exploiting buy-and-hold investors.

Keywords: Fair Valuation, Financial Fragility, NAV-timing, Real Estate

JEL Classification: G11, G12, G13, G14, G17, G23, R33