Working Paper

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

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.

JEL Classification: G01; G11; G23; G28;

https://doi.org/10.17016/FEDS.2025.106

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2025-12-15

Number: 2025-106