Risk Preference of Irish-Domiciled Investment Funds

Lanxin Lu and Pawel Fiedor
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Lanxin Lu: Central Bank of Ireland
Pawel Fiedor: Central Bank of Ireland

No 2/FS/25, Financial Stability Notes from Central Bank of Ireland

Abstract: In this note, we explore whether the way fund managers invest can lead to risks that affect the entire financial system. We found that managers of bond funds in Ireland tend to invest in riskier assets when interest rates drop, possibly to achieve higher returns. In contrast, managers of equity funds do the opposite. We also discovered that bond funds receive more money from investors when interest rates are higher. Furthermore, equity funds attract more investments when they take on more risk. Our analysis is based on how fund managers allocate their investments, revealing their willingness to take risks. When fund managers seek higher returns by taking more risks, it can make the financial system more vulnerable and increase the chance of severe economic downturns. These insights are crucial for monitoring financial stability and guiding policies for non-bank financial institutions, which have become more significant since more assets have shifted from banks to non-banks after 2008.

Date: 2025-05
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