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Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks

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Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks. / Hass, Lars Helge; Johanning, Lutz; Rudolph, Bernd et al.
In: International Review of Financial Analysis, Vol. 21, 01.2012, p. 90-107.

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Harvard

Hass, LH, Johanning, L, Rudolph, B & Schweizer, D 2012, 'Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks', International Review of Financial Analysis, vol. 21, pp. 90-107. https://doi.org/10.1016/j.irfa.2011.11.001

APA

Hass, L. H., Johanning, L., Rudolph, B., & Schweizer, D. (2012). Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks. International Review of Financial Analysis, 21, 90-107. https://doi.org/10.1016/j.irfa.2011.11.001

Vancouver

Hass LH, Johanning L, Rudolph B, Schweizer D. Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks. International Review of Financial Analysis. 2012 Jan;21:90-107. doi: 10.1016/j.irfa.2011.11.001

Author

Hass, Lars Helge ; Johanning, Lutz ; Rudolph, Bernd et al. / Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks. In: International Review of Financial Analysis. 2012 ; Vol. 21. pp. 90-107.

Bibtex

@article{e25735a4670c4614bea7911665707d49,
title = "Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks",
abstract = "In addition to the well-established forms of real estate investing (direct and listed), investors can also choose open-ended property funds (OPFs), which are considered a complementary real estate investment option. OPF fund managers generally provide daily liquidity, and these funds must maintain at least 5% liquidity. If liquidity falls below 5%, share redemptions will be temporarily suspended, for a period of up to two years. During this time, investors can only sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to examine the impact of OPFs as an investment vehicle on the risk and return profile. OPFs in principle have the same underlying as direct and listed real estate investments, but they are subject to a different regulatory regime. Therefore, we analyze the diversification benefits of OPFs in mixed-asset portfolios for various risk measures, investor types, and holding periods. We find that OPFs are ideally suited to reduce portfolio risk. This result holds independent of the holding period and whether in- or out-of-sample Monte Carlo portfolio simulations are used. However, these positive effects come at the cost of increased risk from temporary share redemption suspensions. During these periods, investors may have to accept an average 6% discount in the secondary market compared to the net asset value calculated by OPFs themselves. These discounts can go as high as 20% if investors fear that OPF management will not be able to ensure liquidity within the two-year time limit, and will have to “fire-sell” properties. ",
keywords = "Downside risk, Illiquidity , Open-ended property funds , Temporary suspension of share redemptions",
author = "Hass, {Lars Helge} and Lutz Johanning and Bernd Rudolph and Denis Schweizer",
year = "2012",
month = jan,
doi = "10.1016/j.irfa.2011.11.001",
language = "English",
volume = "21",
pages = "90--107",
journal = "International Review of Financial Analysis",
issn = "1057-5219",
publisher = "Elsevier Inc.",

}

RIS

TY - JOUR

T1 - Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks

AU - Hass, Lars Helge

AU - Johanning, Lutz

AU - Rudolph, Bernd

AU - Schweizer, Denis

PY - 2012/1

Y1 - 2012/1

N2 - In addition to the well-established forms of real estate investing (direct and listed), investors can also choose open-ended property funds (OPFs), which are considered a complementary real estate investment option. OPF fund managers generally provide daily liquidity, and these funds must maintain at least 5% liquidity. If liquidity falls below 5%, share redemptions will be temporarily suspended, for a period of up to two years. During this time, investors can only sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to examine the impact of OPFs as an investment vehicle on the risk and return profile. OPFs in principle have the same underlying as direct and listed real estate investments, but they are subject to a different regulatory regime. Therefore, we analyze the diversification benefits of OPFs in mixed-asset portfolios for various risk measures, investor types, and holding periods. We find that OPFs are ideally suited to reduce portfolio risk. This result holds independent of the holding period and whether in- or out-of-sample Monte Carlo portfolio simulations are used. However, these positive effects come at the cost of increased risk from temporary share redemption suspensions. During these periods, investors may have to accept an average 6% discount in the secondary market compared to the net asset value calculated by OPFs themselves. These discounts can go as high as 20% if investors fear that OPF management will not be able to ensure liquidity within the two-year time limit, and will have to “fire-sell” properties.

AB - In addition to the well-established forms of real estate investing (direct and listed), investors can also choose open-ended property funds (OPFs), which are considered a complementary real estate investment option. OPF fund managers generally provide daily liquidity, and these funds must maintain at least 5% liquidity. If liquidity falls below 5%, share redemptions will be temporarily suspended, for a period of up to two years. During this time, investors can only sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to examine the impact of OPFs as an investment vehicle on the risk and return profile. OPFs in principle have the same underlying as direct and listed real estate investments, but they are subject to a different regulatory regime. Therefore, we analyze the diversification benefits of OPFs in mixed-asset portfolios for various risk measures, investor types, and holding periods. We find that OPFs are ideally suited to reduce portfolio risk. This result holds independent of the holding period and whether in- or out-of-sample Monte Carlo portfolio simulations are used. However, these positive effects come at the cost of increased risk from temporary share redemption suspensions. During these periods, investors may have to accept an average 6% discount in the secondary market compared to the net asset value calculated by OPFs themselves. These discounts can go as high as 20% if investors fear that OPF management will not be able to ensure liquidity within the two-year time limit, and will have to “fire-sell” properties.

KW - Downside risk

KW - Illiquidity

KW - Open-ended property funds

KW - Temporary suspension of share redemptions

U2 - 10.1016/j.irfa.2011.11.001

DO - 10.1016/j.irfa.2011.11.001

M3 - Journal article

VL - 21

SP - 90

EP - 107

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

ER -