Swing Pricing and Liquidation Premiums - a systematic review of possible implementations for a mutual fund
One of the primary issues in market turmoil situations, such as bank runs, is the advantage that first movers have: when investors rush to redeem their shares in a fund, those who move first often receive a better asset value, while remaining investors are left to bear the costs related with liquidation. A well-designed liquidity transformation method moves the redemption costs to the redeeming investors, mitigating this first-mover advantage and promoting fairness among all investors.
Swing pricing adjusts the NAV of a fund to reflect the costs associated with redemptions. This adjustment ensures that the remaining investors are equally affected by the costs incurred due to others redeeming their shares. As a result, swing pricing is a key tool in managing funds, designed to mitigate the adverse effects of large-scale redemptions and to break the first-mover advan