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Published & Forthcoming Papers
Review of Financial Studies (2024)
Abstract:
Funds that invest in illiquid assets report returns with spurious autocorrelation. Consequently, investors need to unsmooth returns when evaluating the risk exposures of these funds. We show that funds investing in similar assets have a common source of spurious autocorrelation, which is not addressed by commonly-used unsmoothing methods, leading to underestimation of systematic risk. To address this issue, we propose a generalization of these unsmoothing techniques and apply it to hedge funds and commercial real estate funds. Our empirical results indicate our method significantly improves the measurement of risk exposures and risk-adjusted performance, with stronger results for more illiquid funds.
Real Estate Economics (forthcoming)
* Presentations: Midwest Finance Association, FSU-UF-UCF Critical Issues in Real Estate Research Symposium, FMA Annual Meeting, Conference, Pitt/OSU/Penn State/CMU Finance Conference (Carnegie Mellon), 10th Annual Hedge Fund and Private Equity Conference (Dauphine), University of Cincinnati, Cornell University, the University of Melbourne, the University of Notre Dame, The Ohio State University, Santa Clara University, the Office of Financial Research, the University of Southern California, the University of Virginia.
Abstract:
Open-end funds provide a liquidity transformation service by issuing and redeeming shares that are more liquid than their assets. However, because these assets are illiquid, managers need time to transfer capital to the underlying market. Liquidity buffers and liquidity restrictions enable this. Additionally, because of this illiquidity, their returns are predictable and susceptible to NAV-timing strategies which transfer wealth. I show NAV-timing strategies appear profitable on paper and investors appear to follow these strategies. I also show liquidity restrictions protect against these NAV-timing risks while liquidity buffers do not. In fact, liquidity buffers amplify them when added to liquidity restrictions.
The Journal of Real Estate Finance and Economics (2022)
Abstract:
This paper documents that funds with greater non-core allocations have higher market risk exposure, β, but lower returns. Additionally, it documents that one reason their returns are lower is because they poorly time their investment into these properties. Open-end private real estate funds have higher non-core allocations at the top of the market and lower allocations at the bottom. As such, these funds are disproportionately exposed to the downside of the market. Lastly, I find that reaching for yield and fund flow pressure are important determinants of this phenomenon. Funds buy relatively more non-core properties when either the market return expectations or their net queues are smaller. Buying more core properties when queues are larger enables managers to place capital quicker, but it also hurts existing investors by decreasing their market risk exposure at the time when it is the most desirable and beneficial.
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