Flow-induced redemption costs in funds of funds

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.