The Liquidity Preferences of Mutual Funds in Different Volatility Conditions : Australian Evidence

Following Huang (2013) we hypothesize that Australian mutual funds may increase exposure to liquid assets such as cash and the most liquid assets within their investible universe, in response to a forecast of high market volatility. The switch to liquid assets ensures that the fund can deal with any redemptions in high volatility conditions, at lower cost, and more easily take advantage of any positive alpha opportunities in highly volatile conditions. We find that funds that do increase exposure to cash and the most liquid assets in their investible universe in anticipation of high volatility, outperform those funds that do not follow this strategy. Funds that increase exposure to cash and the most liquid stocks in their investible universe also outperform funds that do not follow this strategy, even in periods of low volatility