Liquidity Transformation Risks and Stabilization Tools: Evidence from Open-end Private Equity Real Estate Funds

USC Lusk Center of Real Estate Working Paper Series

73 Pages Posted: 30 Aug 2019 Last revised: 28 Nov 2022

See all articles by Spencer J. Couts

Spencer J. Couts

University of Southern California - Sol Price School of Public Policy; USC Lusk Center of Real Estate

Date Written: November 8, 2022

Abstract

Open-end funds provide a liquidity transformation service by issuing and redeeming shares that are more liquid than their assets. However, because these assets are illiquid, managers need time to transfer capital to the underlying market. Liquidity buffers and liquidity restrictions enable this. Additionally, because of this illiquidity, their returns are predictable and susceptible to NAV-timing strategies which transfer wealth. I show NAV-timing strategies appear profitable on paper and investors appear to follow these strategies. I also show liquidity restrictions protect against these NAV-timing risks while liquidity buffers do not. In fact, liquidity buffers amplify them when added to liquidity restrictions.

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

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

Suggested Citation

Couts, Spencer J., Liquidity Transformation Risks and Stabilization Tools: Evidence from Open-end Private Equity Real Estate Funds (November 8, 2022). USC Lusk Center of Real Estate Working Paper Series, Available at SSRN: https://ssrn.com/abstract=3445622 or http://dx.doi.org/10.2139/ssrn.3445622

Spencer J. Couts (Contact Author)

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States

USC Lusk Center of Real Estate ( email )

650 Childs Way
Los Angeles, CA 90089
United States

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