Funds of Funds' Portfolio Rebalancing during the COVID-19 Crisis

Nathan Foley-Fisher and Jeongmin Lee
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Jeongmin Lee: https://www.federalreserve.gov/econres/jeongmin-mina-lee.htm

No 2025-106, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: During the COVID-19 crisis, large outflows from bond mutual funds disrupted debt markets. We show that ""funds of funds""-mutual funds that invest in other mutual funds-accounted for a third of those outflows in March 2020. They rebalanced their portfolios mechanically in response to equity market losses, selling bond funds and purchasing equity funds. While they sold 14 percent of their total bond fund holdings, they concentrated sales in government bond funds, liquidating 34 percent of their holdings, over 100 percent of outflows from these funds. Our findings highlight how mechanical portfolio rebalancing can transmit shocks across markets and generate destabilizing effects.

Keywords: Liquidity; Mutual funds; Financial stability; Systemic risk (search for similar items in EconPapers)
JEL-codes: G01 G11 G23 G28 (search for similar items in EconPapers)
Pages: 62 p.
Date: 2025-12-15
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:102366

DOI: 10.17016/FEDS.2025.106

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