What are redemptions and why is it a concern?
For open ended funds, what exactly are redemptions, how do they work, how does it impact the fund manager, why are they important, etc? Thanks in advance !
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Means investors take their money back. May cause a fund manager to need to start selling assets. Can push asset prices down and hurt returns. That in return can damage the ability of the fund manager to raise capital in the future and put them out of business
How would the fund manager price the asset today and the money they would give them back as part of this redemption given there’s been such few trades ?
If there is a market for the asset and that asset is trading hands at a certain price, that would seem like a fair number to value the asset at unless those numbers are completely stale/outdated. Otherwise, I think there’s a GS saying or a Lloyd Blankfein saying that if you don’t know what the price is, sell some of it and then you can get your mark. Otherwise there are other ways to try to value it such as mark-to-model whereby the manager or a 3rd party like Houlihan Lokey or one of the real estate valuation firms can put together a financial model using like a DCF analysis or other types of commonly accepted valuation techniques like cap rates, precedent transactions, comparable publicly traded companies, net asset value, book value or the like and use that as a basis for valuation. Or the manager can see if their investor would be willing to take ownership of the asset instead of getting their cash back.
Heard PGIM is getting shafted.
The key feature of the "open-end" fund is that each quarter they set a price (called NAV or net asset value) for each share interest in the fund and allow investors to buy and sell at that price. In normal times, there are "queues" for buying into the fund and selling out of the fund. Then each quarter, the fund manager "nets" the buy/sell orders and allows in as much new money as they want (they will generally not take what they don't think they can invest/deploy as cash drags down returns). In "normal" or "good" times there is usually more people wanting to put money in than take out, and there is an effective waiting list to invest.
In "bad" times (like now....., when NAVs are expected to fall, and surely many did in 3Q), more people want their money back. The fund manager now has to manage, per the terms of the fund's subscription agreements, how to manage a "full queue"... This means giving back as much as can be allowed for with fund liquidity, and then make plan to provide more liquidity as best practical. This is where it gets messy...... fund managers have rules that allow them to basically claim "market trouble" or whatever and hold off selling assets. But this can only work so-long and investors (who you count on for long-term profitability) get pissed! So, eventually, the fund could be forced to sell assets at shitty prices.
Impact to the fund manager..... falling AUM means falling fees, falling NAVs mean no performance payouts (promotes) and thus no bonuses, plus it looks bad from a reputational point of view. This is the time where good managers earn their stripes, outperform now and you can have a great story to tell during a recovery and raise tons of new money! Fuck it up and look worse then peers and you could be permanently harmed (until management gets fired...). Stressful times ahead for sure!
Thanks for this. What could a good manager do vs a bad one if they are all getting a ton of redemption ques? Aren’t they both getting fucked either way?
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