Redemption in Kind and Mutual Fund Liquidity Management

70 Pages Posted: 1 Apr 2020 Last revised: 17 Jun 2022

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Honglin Ren

Renmin University of China - School of Business

Ke Shen

Lehigh University - College of Business

Haibei Zhao

Lehigh University - College of Business

Date Written: June 15, 2022

Abstract

Open-end mutual funds can use redemption in kind to satisfy investor redemptions by delivering securities instead of cash. We find that funds that reserve their rights to redeem in kind experience less redemption after poor performance. Evidence from actual in-kind transactions reveals several unique mechanisms for redemption in kind to mitigate fund runs, including the delivery of more illiquid stocks and stocks with greater tax overhang. Funds suffer less from the adverse impact of outflows on their performance. However, redeeming investors bear significant liquidation costs when they sell securities, which is associated with destabilization in the prices of these securities.

Keywords: redemption in kind, mutual funds, liquidity management, financial fragility, tax overhang

JEL Classification: G23, G28, H25

Suggested Citation

Agarwal, Vikas and Ren, Honglin and Shen, Ke and Zhao, Haibei, Redemption in Kind and Mutual Fund Liquidity Management (June 15, 2022). Available at SSRN: https://ssrn.com/abstract=3527846 or http://dx.doi.org/10.2139/ssrn.3527846

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://vagarwal.gsucreate.org/

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Honglin Ren

Renmin University of China - School of Business ( email )

Beijing
China

Ke Shen

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States
(610) 758-1084 (Phone)

Haibei Zhao (Contact Author)

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

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