It added that the comparison of fund performance with peers and benchmarks can result in a variety of trading dynamics with potentially systemic implications, such as excessive risk-taking, contagion or herding.
Easy redemption options offered by funds is another risk due to first-mover advantage – which allows investors redeeming earlier than others to recover more money as the liquidation value of fund shares declines.
According to the IMF, open-ended funds in particular are exposed to redemption risk because investors have the option to cash in their shares – usually on a daily basis – while funds have increasingly been investing in relatively illiquid securities such as high-yield corporate bonds and emerging market assets.
“Large-scale sales by funds may exert significant downward asset price pressures, which could affect the entire market and trigger adverse feedback loops. The effects on asset prices could have broader macrofinancial consequences: affecting the balance sheets of other players in financial markets, reducing collateral values and reducing credit financing for banks, firms, and sovereigns.”
However, the IMF acknowledged that asset managers appear to actively manage their liquidity risks with precautionary cash buffers – particularly those investing in relatively less liquid assets.
In addition, fund investing in more illiquid assets tends to set higher fees than those investing in liquid assets which mitigates redemption pressures during stress periods, according to the study.
A spokesperson for Vanguard, which handles approximately $3.1trn (£2.08trn) in assets, said: “Vanguard carefully considers liquidity risk in managing portfolios and takes an approach that is tailored to the portfolio and has multiple layers of protection.”
She added: “When confronted with redemptions, our objective is to maintain the risk exposures of the fund by selling across the funds’ holdings, while also factoring in trading costs.
“We do not typically allow liquidity reserves to run off as we do not have perfect foresight as to when the redemptions will subside, and want to ensure adequate liquidity going forward.”
According to the IMF document, funds managed by large asset managers do not necessarily contribute to systemic risk. Instead, the investment focus appears to be relatively more important than size.
This is important when exploring whether large asset managers and funds should be designated as systemically important financial institutions – an issue discussed by regulators globally, according to the IMF.
The risk to global stability that is posed by the ownership of a number of AMCs by bank and insurance companies remains unclear, according to the IMF.
It adds that without proper oversight of related-party exposures and concentrated exposures, funds could be used as funding vehicles for their AMC’s parent banks.
The report said: “These inter-relationships increase the concentration of financial services providers across various sub-segments of the financial sector, creating potentially very influential and complex mega conglomerates.”