* 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.
This paper documents a new source of financial fragility and studies its interactions with common stabilization tools. Economists believe that funds report stale Net Asset Values (NAVs) when they invest in illiquid assets. This staleness creates return predictability, which in turn creates NAV-timing and fund fragility risks for open-end funds. However, because the underlying assets are illiquid, managers limit fund flows to prevent having to pay premiums or sell at discounts. A secondary consequence of limiting fund flows is that it protects against the risks created by having stale NAVs. Paradoxically, illiquidity in the underlying assets creates both the opportunity for, and the friction against, exploiting buy-and-hold investors. I show that contrary to casual intuition, using cash to buffer flows reintroduces wealth transfer risks and increases the incentive for shareholders to run.
Review of Financial Studies, R&R
* Presentations: 2020 Northern Finance Association Conference (upcoming), 2020 SFS Cavalcade North America Conference (University of Indiana), 2020 Ohio State Finance Alumni Conference, 2020 Institute for Private Capital Research Symposium (University of North Carolina), University of Arizona, University of North Carolina - Chapel Hill
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.
* Presentations: 3rd Annual REALPAC/Ryerson Canadian Commercial Real Estate Research Symposium (upcoming; Ryerson) , 2020 Commercial Real Estate Data Association Conference (upcoming; University of North Carolina), 2020 Real Estate Finance and Investment Symposium (upcoming; University of Cambridge, University of Florida, University of Geneva, & National University of Singapore), 2021 NCREIF Winter Conference (upcoming), 2019 3rd Annual Private Markets Research Conference (Switzerland)
This paper documents that development exposure is an important determinant of private real estate returns and market risk exposure. It also documents that open-end private real estate funds have time-varying, procyclical market risk exposure through their development activities. As such, these funds are disproportionately exposed to the downside of the market cycle. Lastly, I find that fund flow pressure is the primary driver of time-varying development exposure. Funds buy a higher proportion of safe, liquid assets compared to risky, illiquid assets when they have larger unfulfilled subscriptions. While this increases assets under management quicker, it also hurts existing investors by decreasing their market risk exposure at the time when it is the most desirable and beneficial. Additionally, funds stop developing as redemption requests increase, leading to lower market risk exposure when the market recovers.