The Federal Reserve Bank of Boston has released findings on the behavior of retail investors in prime money market funds during financial crises, presenting evidence that individual investors reacted more sensitively after the COVID-19 crisis compared to the 2008 financial crisis. The analysis indicates a potential increase in the likelihood of retail investors rapidly liquidating their investments during periods of economic stress, a behavior also known as “running” on a fund.
Kenechukwu Anadu, a vice president in the Boston Fed’s Supervision, Regulation & Credit department and coauthor of this research note, highlighted the significance of these findings. “Retail investors in prime money market funds may be getting increasingly more reactive,” Anadu observed, considering this trend as a factor to be addressed regarding financial stability vulnerabilities.
The Supervisory Research and Analysis Unit at the Boston Fed, in collaboration with the University of Western Australia’s Nico Oefele, published a note titled “Are retail prime money market fund investors increasingly more sensitive to stress events?” Coauthors along with Anadu include John Levin, Lina Lu, and Antoine Malfroy-Camine.
Prime money market funds invest in short-term private assets carrying credit risk. These funds strive to maintain a stable net asset value of $1 per share. Changes introduced by the U.S. Securities and Exchange Commission (SEC) in 2014 aimed to improve the stability of institutional prime funds, requiring a floating net asset value. However, these reforms did not encompass retail prime funds.
The report uses data sourced from iMoneyNet, analyzing daily net flows of retail and institutional prime funds from January 2007 to December 2023 through regression analysis. This method studies the relationship between variables, in this case, investor response during economic turmoil.
The study reveals that institutional funds experienced significant outflows of around 30% during both financial crises, while retail funds exhibited cumulative outflows of 4% during the 2008 crisis and escalated to 9% in the 2020 crisis. Despite remaining smaller in scale compared to institutional responses, the growing reactivity of retail investors forms a key takeaway.
These behavioral changes might be partially attributed to increased access to fund information, as emphasized by Anadu. Improvements in information reporting, transitioning from quarterly to more frequent updates, occurred following SEC reforms. “If retail investors are becoming more reactive to stressful events, then they may be more likely to run in the future,” Anadu warned, underlining the implications for financial stability.
More details on this research can be found at bostonfed.org. Amanda Blanco of the Federal Reserve Bank of Boston’s communications team facilitated the release.
For additional insights, journalists can engage with Boston Fed experts and access other resources through their media relations team.
