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Quantifying Potential Spillovers from Runs on High-Yield Funds

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Abstract

On December 9, 2015, Third Avenue Focused Credit Fund (FCF) announced a “Plan of Liquidation,” effectively halting investor redemptions. This announcement followed a period of poor performance and large outflows. Assets at the fund had declined from a peak of $2.5 billion in May of 2015 to $942 million in November. Investors had redeemed more than $1.1 billion in shares since April 2015, and the fund’s year-to-date performance as of November had fallen below -21 percent. The FCF “run” highlights the need to quantify the potential for systemic risk among open-end mutual funds and the potential for contagion in the event of more widespread runs on other vulnerable funds. In this post, we first characterize open-end mutual funds that seem vulnerable to redemptions in much the same way as FCF. We then analyze the potential for fire-sale spillovers to other mutual funds if large redemptions in “at-risk” funds were to occur.

Suggested Citation

  • Nicola Cetorelli & Fernando M. Duarte & Thomas M. Eisenbach & Emily Eisner, 2016. "Quantifying Potential Spillovers from Runs on High-Yield Funds," Liberty Street Economics 20160219b, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87103
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    Cited by:

    1. Agostino Capponi & Paul Glasserman & Marko Weber, 2018. "Swing Pricing for Mutual Funds: Breaking the Feedback Loop Between Fire Sales and Fund Runs," Working Papers 18-04, Office of Financial Research, US Department of the Treasury.

    More about this item

    Keywords

    fire sales; high yield; Mutual funds;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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