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FRM Part I · FRM Exam Part I · Fund Management

Which statement best explains why an open-end fund generally must hold more liquid assets than a comparable closed-end fund?

Open-end funds must redeem shares at NAV on demand, so heavy outflows can force asset sales and require liquidity buffers. Closed-end funds have a fixed number of shares and investors exit by selling to others on an exchange, so the portfolio is not liquidated.

  1. AOpen-end funds must meet redemptions at NAV, so large investor outflows can force asset sales, while closed-end funds have a fixed share count and investors exit by selling on the marketCorrect
  2. BOpen-end funds are prohibited from holding illiquid securities, while closed-end funds are permitted to hold them
  3. CClosed-end funds must redeem shares at NAV on demand, whereas open-end funds cannot redeem
  4. DOpen-end funds trade at discounts to NAV, forcing them to hold cash to close the gap

Explanation

Open-end funds stand ready to redeem at NAV, creating liquidity risk from outflows. Closed-end shares are sold to other investors, so the portfolio is not liquidated. The other options misstate redemption rights; prohibitions on illiquid holdings are not absolute, and discounts apply to closed-end funds.

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