Redemption risk and cash hoarding by asset managers

Open-end mutual funds face redemptions by investors, but the sale of the underlying assets depends on the portfolio decision of asset managers. If asset managers use their cash holding as a buffer to meet redemptions, they can mitigate fire sales of the underlying asset. If they hoard cash in anticipation of redemptions, they will amplify fire sales. We present a global game model of investor runs and identify conditions under which asset managers hoard cash. In an empirical investigation of global bond mutual funds, we find that cash hoarding is the rule rather than the exception, and that less liquid bond funds display a greater tendency toward cash hoarding.

JEL classification: E52, G11, G15, G23

Keywords: asset manager, bond market liquidity, cash hoarding, global game, investor redemption, strategic complementarity