Plain-vanilla money manager strategies and investments can pose risks to financial stability, said the International Monetary Fund in its global financial stability report.
The report, Navigating Monetary Policy Challenges and Managing Risks, includes a chapter focused on the money management industry and financial stability relating to it.
The IMF acknowledged in its report that money managers help investors to diversify assets, provide financing to the real economy and have advantages over banks when it comes to financial stability. “Nonetheless, concerns about potential financial stability risks posed by the asset management industry have increased recently as a result of that sector’s growth and of structural changes in financial systems,” the report said.
Besides risks from leveraged hedge funds and money market funds, which the IMF said “are already widely recognized,” investment strategies such as mutual funds and exchange-traded funds can also pose risks.
The report said the delegation of the day-to-day management of portfolios “introduces incentive problems between end investors and portfolio managers,” such as evaluation of manager performance vs. peers or benchmarks. This “can encourage destabilizing behavior and amplify shocks,” the report said.
The IMF also cited “easy redemption options and the presence of a first-mover advantage” as potentially creating risks of a run, “and the resulting price dynamics can spread to other parts of the financial system through funding markets and balance sheet and collateral channels.”
The report said empirical analysis shows evidence for risk creation, although that varies across asset markets. “Mutual fund investments appear to affect asset price dynamics, at least in less liquid markets. Furthermore, incentive problems matter: herding among portfolio managers is prevalent and increasing.”
However, the IMF added that analysis shows that size does not matter: “Larger funds and funds managed by larger asset management companies do not necessarily contribute more to systemic risk; the investment focus appears to be relatively more important for their contribution to systemic risk,” the report said.
The IMF concluded that industry oversight should be strengthened, and that securities regulators should “shift to a more hands-on supervisory model, supported by global standards on supervision and better data and risk indicators.”
The report is available on the IMF’s website.