Redemption in Kind and Mutual Fund Liquidity Management

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, costs 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

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