Blackstone – a US-based asset manager – recently limited withdrawals from its $125 billion real estate open-ended investment fund, Blackstone Real Estate Income Trust. Allegedly, a large number of investors had requested redemptions from the fund at the same time, forcing the fund to partially suspend its redemptions.
What happened, in effect, was this: open-ended funds promise investors the ability to redeem their holdings in the fund on a regular basis. However, if the open-ended fund owns illiquid assets like property or private equity, then it won’t be able to satisfy large redemptions as its holdings can’t be sold quickly (at least, not without a sharp discount).
In financial jargon, we call this a ‘liquidity mismatch’, where a liquid investment vehicle is paired with illiquid assets. The concept of ‘matching’ is fundamental in finance, and mismatches represent a significant source of (often hidden) risk.
In our own investment industry, many UK property funds had to temporarily suspend redemptions in the wake of the Brexit vote as investors rushed to redeem holdings.
The Woodford Equity Income Fund (WEIF) is another example. It invested in a mix of liquid listed shares and private, illiquid venture capital assets. As investors redeemed their holdings in the fund, WEIF sold listed shares to fund them. Eventually, the illiquid assets came to represent an ever-larger portion of the fund until finally the fund was forced to suspend its redemptions.
A much better way to invest in illiquid assets is through a closed-ended fund structure. This way, when an investor wishes to sell their shares in the fund, they have to find another buyer willing to take them off their hands. The fund does not have to worry that it will suddenly see a large number of redemption requests.
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