Clients place “standing bids” in percent or dollar “parameters” which are repeated automatically in each auction until revised. Parameters specify the fee the fund is willing to pay, its “strategic reserve,” or percent of AUM it wishes to keep as cash, its “tactical reserve,” or an additional reserve specified in dollars, its “holding cap,” or maximum share of AUM that it is willing for ReFlow to hold, within the 3% limit, and its “flow cap,” or maximum share of negative reported flow not covered by the buffer, that it wishes ReFlow to buy. Flow cap is zero on days when reported flow is positive, meaning that the bid is also zero on those days. On net redemption days, the standing bid is for the stated share of net redemptions, within the holding cap, after exhaust of the buffer.
ReFlow recommends percent flow cap and holding cap, rather than dollar amounts, for automatic adaptation to daily changes in flow and AUM. We cannot think of an advantage for dollar parameters, but allow this option in case clients can. Neither percent nor dollar bids can win more than would offset net redemptions to zero, even if the bid succeeds, or more than would fill the 3% statutory limit. We also suppose that a client will probably not want to sell us new shares to offset pushback, or the client's own voluntary redemptions, but will probably prefer to sell portfolio assets instead. Both of these are subtracted from what the client's bid would otherwise have been, and the amount left is finally trimmed as necessary to fit within the 3% limit, or the client-specified holding cap if less.
Percent parameters, carefully chosen, may be left in place until the conditions that determine them change. The fee bid, for example, should probably reflect what the bidding fund expects that its cost of liquidation would be if the bid failed, including something for avoidance of tax effects to passive shareholders. That strategy should lose in no circumstances, and should gain whenever the clearing fee proved less. Funds expecting high portfolio turnover costs might therefore bid more than the average, and conversely. When alternative costs change, so should the fee bid. Research
available here analyzes turnover costs by investment style.
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