FRM Part II · FRM Exam Part II · Illiquid Assets
An investor in a semi-liquid fund that offers quarterly redemptions notes that the fund holds mostly illiquid loans. Which feature most helps limit the first-mover advantage among investors in a stressed market?
Redemption gates or swing pricing best limit first-mover advantage. They make redeeming investors bear the cost of liquidating illiquid assets, or cap the amount that can leave, so remaining investors are not left holding a more illiquid portfolio at a lower value.
- ARedemption gates or swing pricing that pass liquidation costs to redeeming investorsCorrect
- BDaily publication of the fund's holdings
- CIncreasing the fund's leverage
- DValuing assets at historic cost
Explanation
Gates and swing pricing reduce the incentive to redeem first because redeemers bear the cost of liquidity or are limited in size. Holdings disclosure does not change incentives, leverage adds risk, and historic-cost valuation can increase the incentive to redeem at stale high values.
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