Finance and Economics Discussion Series (FEDS)
December 2025
Funds of Funds' Portfolio Rebalancing during the COVID-19 Crisis
Nathan Foley-Fisher and Jeongmin (Mina) Lee
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: Funds of Funds, Mutual Funds, Portfolio Rebalancing, Bond Fund Outflows, COVID-19 Crisis, Target-Date Funds, Financial Fragility
DOI: https://doi.org/10.17016/FEDS.2025.106
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.