Price Predictability in Liquid Funds with Illiquid Underlying Assets

Abstract

Daily priced real estate (DPRE) funds are designed to provide investors with daily liquidity while investing in illiquid private assets. DPRE fund returns are predictable, allowing for a trading strategy based on predicted returns to generate trading profits of 60–132 bps a year. Funds with higher predicted returns have higher investor flows, but the flow to future predicted performance relationship is no stronger for DPRE funds with higher return predictability than those with lower return predictability. This appears to be the result of trading constraints on highly predictable institutional DPRE funds. Even modest trading restrictions on monthly redemptions render profits from trading strategies based on return predictability economically insignificant.