Mandatory disclosure of open-ended real estate fund shares that are registered for redemption?

Abstract

Open-ended funds that invest in long-term assets face constant liquidity transformation risk, which can lead to financial instability. German lawmakers have responded to the liquidity crisis of open-ended real estate funds by introducing mandatory minimum holding and notice periods of 24 and 12 months, respectively. Since the new regulations were enacted in July 2013, the management companies of German open-ended real estate funds have received detailed information on the expected cash outflows from share redemptions. This article explores the question of whether the number of shares registered for redemption should be disclosed. A teleological analysis of German fund accounting law and regulation reveals a mismatch between the current nondisclosure and the stated objective to provide decision-useful information. However, a trade-off must be made between investors’ need for information and the risk of self-reinforcing panic effects, which is investigated using agent-based modeling. Parameterizing the model with historical fund data shows that disclosure would increase the probability of a redemption suspension but that such suspensions would occur timelier; thus, fewer investors would be trapped in a fund that has to suspend the redemption of shares. In addition, such disclosure would shift not only risk from uninformed, life-cycle, saving investors to sophisticated investors but also investment returns from sophisticated investors to saving investors. Such disclosure would thus constitute the opposite of what Georgakopoulos (1996, 2017) calls a disclosure subsidy for informed traders, i.e., a disclosure subsidy for uninformed investors that is borne by informed investors. However, the model in this article is distinguishable from the one outlined in Georgakopoulos (1996, 2017) because it does not model noise traders. The framework provided in this article is also relevant to the legislature in the United Kingdom and its recently created fund category of long-term asset funds.