ReFlow’s Redemption Service is a cost-effective liquidity solution for funds experiencing net outflows. It provides access to liquidity as needed to meet redemptions, eliminating the costs and effort of flow-induced trading while keeping investment strategies intact. It also offers features that let funds improve tax-efficiency.
The Redemption Service can be used on its own, or can provide a source of backstop liquidity when used in conjunction with ReFlow’s NAVswap service.
- In essence, ReFlow provides cash in exchange for a position in the fund, paying expenses and incurring market risk like any other shareholder.
- Funds then redeem ReFlow’s shares within 28 days as new inflows are received.
- As an option, funds may choose to redeem ReFlow’s shares within 14 days with securities of their choosing. This “in-kind” redemption option allows funds to lower taxable distributions by redeeming ReFlow’s position with the low-cost-basis lots of securities on their “sell” lists.
How It Improves Performance
- Insulates funds from costs and risks resulting from flow-generated transactions, thus lowering expenses for all shareholders. ReFlow clients often report cost savings in the range of 50 to 100 bps per year.
- Preserves performance gains and helps funds to rise in the rankings.
- Saves portfolio managers time they would otherwise spend determining which securities to sell.
- Frees portfolio managers to carry out their strategies unimpeded by shareholder flow.
How It Works
The mechanics of ReFlow’s Redemption Service utilize the mechanisms funds already have in place. No changes to existing operations are required once the service is set up.
- Funds may receive capital equaling up to 3% of total net assets – the maximum allowed under SEC rules.
- Capital is allocated via a Dutch auction, the same way T-bills are sold.
- Participation can be fully automated so that a standing bid is triggered whenever a preset amount or percentage of net outflow is reached.
- The base bid is 15 basis points; highest bids are filled first.
- Funds may redeem capital with cash or securities at any time within 28 days, as net inflows are received or cash becomes available.
- Fees are transaction-based, transparent, and qualify as a bona fide fund expense. Aside from a modest setup charge, users pay fees only when using the service.
- Mutual fund board approval is required.
Advantages
- Less costly and easier to implement than selling securities to raise cash.
- More accessible and more cost-effective than lines of credit, which have become harder to secure and involve significant setup and maintenance fees.
- A more comprehensive solution. Unlike lines of credit, which are generally tapped only when funds experience a major shortfall in liquidity, ReFlow is designed for everyday use.
- Proactive and consistent rather than reactive and after-the-fact. ReFlow goes into effect without delay whenever net outflows are experienced.
