Expected Fund Development with Serially Correlated Rates of Return

For many endowment funds and sovereign wealth funds draws tend to be tied to the expected financial returns. As shown by Dybvig and Qin, such a rule will eventually deplete the fund even if its value is preserved in expectation. We add to their results by finding that, if the financial returns are negatively serially correlated, the value will not even be preserved in expectation. In the presence of long-run purchasing power parity, such correlation is likely to be present for small-country funds invested globally in foreign-currency denominated assets with withdrawal rules based on the fund’s domestic-currency value