Connected but fragile: Fund-to-fund holdings and redemptions

Abstract

Investment funds are increasingly investing in other funds. I study the implications of this using Czech fund data from 2011 to 2022. Cross-fund holdings boosted diversification and returns, albeit with increased volatility. Moreover, the funds primarily sold fund shares compared to other assets to pay large redemption proceeds, especially during stressful periods. I then explore individual fund-to-fund redemptions and show increasing redemptions from funds experiencing outflows of investors. The relation is pronounced for shares held that are issued by less liquid funds, consistent with elevated strategic complementarity among the remaining investors that the funds seem to amplify further. Finally, the study investigates supportive behavior within fund families, finding evidence of increased purchases of constituents of those families that are subject to redemptions.