Institutional Synergies and the Fragility of Loan Funds

64 Pages Posted: 3 Feb 2022 Last revised: 15 Jun 2023

See all articles by Mustafa Emin

Mustafa Emin

Tulane University

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Tao Li

University of Florida - Department of Finance, Insurance and Real Estate

Jing Lu

University of Florida

Date Written: November 15, 2021

Abstract

There are two major institutional investors in the syndicated loan market: collateralized loan obligations (CLOs) and loan mutual funds. CLOs are closed-end funds while loan funds are open-end funds that issue claims that are redeemable on demand. In this paper, we examine whether CLOs provide arbitrage capital that contributes to the resilience of loan funds. We find that CLOs act as shock absorbers, providing liquidity through par building trades when loan funds experience large outflows. However, CLO-provided liquidity is limited to par build eligible loans, leading to potential flow-induced fire sales among par ineligible loans.

Keywords: Leveraged loan, Mutual fund, CLO, Fire sale, Fragility

JEL Classification: G23, G38

Suggested Citation

Emin, Mustafa and James, Christopher M. and Li, Tao and Lu, Jing, Institutional Synergies and the Fragility of Loan Funds (November 15, 2021). Available at SSRN: https://ssrn.com/abstract=4024592 or http://dx.doi.org/10.2139/ssrn.4024592

Mustafa Emin

Tulane University ( email )

1440 Canal St.
NEW ORLEANS, LA 70112

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

Tao Li (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/contact/profile.asp?WEBID=7628

Jing Lu

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

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