Days to liquidate position by position, the fund's liquidity profile, and what meeting a redemption from the most liquid assets leaves for the investors who stay.
Days to liquidate a position is its size divided by the volume you can sell each day without moving the price, usually a participation rate times average daily volume: days = position / (participation × ADV). On an illustrative 500.0 million fund at 20 per cent participation, positions take from 0.05 to 20.0 days, the value-weighted average is 9.31 days, and 63.0 per cent of the fund can be sold inside a week. Meeting a 10 per cent redemption from the most liquid assets cuts that to 58.9 per cent.
Worked in full in Financial Risk Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A long-only multi-asset fund with six positions. Average daily volume (ADV) is the market's average daily traded value in each line; the fund assumes it can be 20 per cent of that volume each day without a material price impact. A week is five trading days. All figures are illustrative, in millions.
| Position | Market value | ADV | Sellable a day at 20% | Days to liquidate | Sellable in a week |
|---|---|---|---|---|---|
| Large-cap equities | 120.0 | 400.0 | 80.0 | 1.50 | 120.0 |
| Mid-cap equities | 90.0 | 60.0 | 12.0 | 7.50 | 60.0 |
| Small-cap equities | 60.0 | 15.0 | 3.0 | 20.00 | 15.0 |
| Investment-grade bonds | 100.0 | 50.0 | 10.0 | 10.00 | 50.0 |
| High-yield bonds | 80.0 | 20.0 | 4.0 | 20.00 | 20.0 |
| Government bonds and cash | 50.0 | 5,000.0 | 1,000.0 | 0.05 | 50.0 |
| Fund | 500.0 | 9.31 (weighted) | 315.0 |
Days to liquidate = Market value / (Participation rate × ADV)
Mid-cap equities: 90.0 / (20% × 60.0) = 90.0 / 12.0 = 7.50 days
Excel: =MV/(Part*ADV); sellable within N days: =MIN(MV,N*Part*ADV)
For bonds, where ADV is thin and patchy, desks often replace it with a dealer estimate of what can be sold per day at a given haircut. The formula is the same; the input is a judgement rather than a statistic.
There are three useful fund-level numbers, and they say different things.
| Within | Sellable | % of fund |
|---|---|---|
| 1 day | 159.0 | 31.8% |
| 5 days (one week) | 315.0 | 63.0% |
| 10 days | 430.0 | 86.0% |
| 20 days | 500.0 | 100.0% |
The one-week figure, 63.0 per cent, is the largest redemption the fund could meet in a week at this participation rate, provided it is willing to sell whatever is easiest.
A 10 per cent redemption, 50.0, arrives. Two ways to meet it:
| Policy | Days to raise the cash | Fund after | Sellable in a week after | % of fund |
|---|---|---|---|---|
| Vertical slice: sell 10% of every position | 2.0 | 450.0 | 298.0 | 66.2% |
| Liquid first: sell government bonds and cash | 0.05 | 450.0 | 265.0 | 58.9% |
Liquid first is faster and, in transaction costs, cheaper. It also leaves the remaining investors in a fund whose one-week liquidity has fallen from 63.0 to 58.9 per cent, and in which small caps and high yield have risen from 28.0 to 31.1 per cent of assets. The vertical slice takes two days, because small caps and high yield each need 2.00 days to sell their tenth, and leaves the profile slightly better than before, at 66.2 per cent. The choice moves the next redemption the fund can meet in a week by 7.3 points of net assets.
The cost of the cheap policy does not appear in money. It appears in the liquidity left for whoever redeems next, which is why days to liquidate should be recomputed after each redemption rather than reported once a month on the portfolio before it.
| Participation | Sellable in a week | % of fund | Longest position, days | Weighted average, days |
|---|---|---|---|---|
| 10% | 242.5 | 48.5% | 40.0 | 18.63 |
| 20% | 315.0 | 63.0% | 20.0 | 9.31 |
| 30% | 387.5 | 77.5% | 13.3 | 6.21 |
The participation rate is the input everybody argues about, and in a stress it is the one that falls: volumes dry up exactly when a fund needs them. Running the profile at half the normal rate is a sensible minimum; here that halves the speed and takes one-week liquidity below half the fund. The same days to sell can also set the horizon of a value at risk, sleeve by sleeve, as worked in how to scale a one-day VaR to ten days.
Divide each position by the daily volume you can take, then report the profile, not just the average: 63.0 per cent sellable in a week here, 58.9 per cent after a liquid-first redemption. The book runs the same engine position by position, with market impact priced on top and six successive redemptions under both policies, in the free workbook for this case. How a stress loss lands on the same fund on the same morning is in how to calculate a credit spread stress loss, and the evergreen-fund version of the question is how big an evergreen fund's liquidity sleeve should be.
There is no single standard; illustratively, funds use something between 10 and 30 per cent of average daily volume, and a stressed rate below the normal one. The choice matters: on this fund one-week liquidity is 48.5 per cent at 10 per cent participation, 63.0 per cent at 20 and 77.5 per cent at 30.
Multiply each position's days to liquidate by its market value, add them up and divide by the fund's value. Here that gives 9.31 days. It should be reported alongside the liquidity profile, because it hides the tail: small caps and high yield, 28.0 per cent of the fund, each take 20.0 days.
Because the fund sells some positions and not others. Meeting a 50.0 redemption from government bonds and cash leaves 58.9 per cent sellable in a week; selling a 10 per cent slice of everything leaves 66.2 per cent but takes 2.0 days. The liquidity of the remaining portfolio depends on the selling policy chosen.
This article is one calculation from Financial Risk Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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