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

Abstract

During the COVID-19 crisis, bond mutual funds experienced significant outflows that disrupted debt markets. We show that "funds of funds"-mutual funds that invest in other mutual funds played a surprisingly large role in this episode. Despite experiencing minimal redemptions themselves, funds of funds rebalanced their portfolios mechanically in response to equity market losses, selling approximately $70-80 billion of bond funds and purchasing equity funds. This behavior accounted for 25-30 percent of all bond fund outflows in March 2020. Our findings highlight how portfolio rebalancing by institutional investors can transmit shocks across markets and amplify financial fragility.

Keywords

Tags of Social Finance