Redemption in Kind and Mutual Fund Liquidity Management
70 Pages Posted: 1 Apr 2020 Last revised: 17 Jun 2022
Date Written: June 15, 2022
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: Suggested Citation