Skilled active liquidity management: Evidence from natural experiments

Abstract

I study the active liquidity management of equity mutual funds in the U.S. First, I show that mutual funds actively increase the liquidity of their portfolios in response to a negative and exogenous shock to investor flows. I document that fund managers use both equity and cash holdings to adjust their portfolio liquidity when subject to sudden and unexpected withdrawals. Second, I argue that active liquidity management is an effective device that skilled managers use to minimize the cost imposed by redemption obligations. I find that funds that actively manage their liquidity to a greater degree significantly outperform their less liquidity-focused peers.