When investors pull money from a fund, the fund does not choose the timing and the settlement clock is fixed by law. In a drawdown, the story goes, that turns funds into forced sellers of their holdings, and the least liquid ones get sold last and worst. Price-insensitive selling in illiquid names is exactly what a patient buyer wants to stand against.
forced flow / fund redemptions
Redemption-driven fund liquidation
The idea
How it was tested
No backtest. Monthly per-fund holdings are on EDGAR, so the data question had an answer, but the entry test comes before data. It read the statute, Investment Company Act s.22(e), and then the funds' own prospectuses, and counted across 2024-2026 filings how often funds reserve a way to meet redemptions without selling.
Where it died
Rejected on 2026-09-20. The statute is real but binds the wrong thing: a fund must pay redemptions within seven days. It is not told what to sell, or whether to sell at all. The prospectuses spell out the alternatives. "Redemption in kind" appears in 6,316 of them, "line of credit" in 7,154, "interfund lending" in 2,887. A fund can hand over securities, borrow, or borrow from a sister fund.
The second half of the thesis fared no better. Standard practice is to meet redemptions from the most liquid holdings first, the opposite of the claim, and no evidence for the claim was ever found. Even a working version would have fired in the same stress weeks as a forced-deleveraging mechanism already in the registry, so it would have added little.
The record
Thesis
Funds facing redemptions cannot control them and the settlement clock is fixed, so in drawdowns they are forced to sell holdings — the least liquid ones last and worst — creating price-insensitive selling.
Gates
Entry test — obligationfail
Is someone actually obliged to trade badly here, and unable to stop?
Why it died
The statutory obligation is real but it is the wrong one. Investment Company Act s.22(e) forces a fund to pay redemptions within seven days; it does not force the sale of any particular holding. Funds reserve, in their own prospectuses, documented ways to avoid selling at all — counted over 2024-2026 filings: "redemption in kind" in 6,316 prospectuses, "line of credit" in 7,154, "interfund lending" in 2,887. The second claim, that the least liquid holdings are sold, reverses standard practice (meet redemptions from the most liquid first) and was never evidenced.
What it taught
Obliged to pay is not obliged to sell this name. The data question (no per-name fund-flow feed) turned out to be irrelevant: monthly per-fund holdings are on EDGAR, but the entry test decides before data matters. Even if real, it would fire in the same stress weeks as a forced-deleveraging mechanism already in the registry, so it added little coverage.
Verdict history
- 2026-09-20Rejected at the entry test — prospectuses reserve in-kind redemption and borrowing Rejected before testing