Liquidity transformation risks and stabilization tools: Evidence from open‐end private equity real estate funds

Spencer J. Couts

Real Estate Economics, 2025, vol. 53, issue 5, 1009-1044

Abstract: Open‐end funds provide a liquidity transformation service when they issue and redeem shares that are more liquid than their underlying assets. However, because these assets are illiquid, their returns are stale and predictable. This makes them susceptible to Net Asset Value‐timing (NAV‐timing) strategies which could transfer significant wealth from buy‐and‐hold investors and creates fund fragility risks. I show that NAV‐timing strategies appear profitable on paper and that investor behavior is consistent with these strategies. I also show that discretionary liquidity restrictions (queues) protect against these wealth transfer and fund fragility risks while liquidity buffers do not. In fact, liquidity buffers amplify them when added to queues.

Date: 2025
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https://doi.org/10.1111/1540-6229.12532

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