Skilled Active Liquidity Management – A Natural Experiment
48 Pages Posted: 30 Aug 2021
Date Written: July 29, 2021
I study the active liquidity management of equity mutual funds in US. First, I show that mutual funds actively increase the liquidity of their portfolio in response to a negative and exogenous shock to investor flows. I document that fund managers use both equity and cash holdings to adjust their portfolio's liquidity when subject to sudden and unexpected withdrawals. Second, I argue that active liquidity management is an effective device that skilled managers use to minimize the cost imposed by redemption obligations. I find that funds that actively manage their liquidity to a greater degree outperform their less liquidity focused peers by up to 4.92% per year.
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