Liquidity Risk, Open-end Funds, And Assets Allocation

Different from the close-end funds, the size of the open-end funds changes as investors can purchase or redeem their funds anytime. This makes open-end funds more liquid than close-end funds, bringing convenience to investors. However, this character produces a big question to fund managers. That is, how to allocate the assets to deal with the cash demand of the redemption, while the affection on assets return is minimized.In this paper, the writer first gives a conception of liquidity, and then analyzed the liquidity risk that open-end funds bare. Methods of getting cash was then listed and analyzed. Among many ways to get cash, three of them were most important. That is, cash assets, debt assets, and other assets like stock.Given the number of investors that purchase or redeem their share of funds comply to poison distribution, and the amounts of shares that one investor purchases or redeems comply with normal distribution, we can find out the distribution of the amounts of purchase of shares or redemption of shares of an open-end funds. Then, a management model was developed for open-end funds to get the proper cash reserve proportion and debt reserve proportion. The model provides us a minimized cash reserve proportion that can maximize the probability of meeting the needs of redemption. After that, the factor that contributes to the redemption of open-end funds, which can effect the estimation of the parameters in the model, was discussed. Got the estimation of the parameters in the model, the results can provide open-end funds managers with a valuable reference to work out the plan of investment to control the proportion of cash reserve in advance.At last, a limitation of the model was discussed. And a method was given to check the model.