Flow-induced redemption costs in funds of funds

Michael Stein, Svetlozar T. Rachev

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

We show that funds of fund managers are best advised to carefully track the possible costs from selling target funds with redemption fees when facing outflows. In this study, we show how different the costs to be incurred may be. While a static approach of estimating the costs to be incurred in the presence of a liquidity shock delivers insight on the span of possible costs at one point of time, a dynamic approach with path-dependent cost effects takes into account the possibility of successive periods of fund cash-flows and the resulting cost effects.

Original languageEnglish
Pages (from-to)253-265
Number of pages13
JournalJournal of Derivatives and Hedge Funds
Volume17
Issue number3
DOIs
StatePublished - Oct 2011

Keywords

  • back-end load fees
  • funds of funds
  • liquidity costs
  • liquidity risk
  • redemption costs

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