International investors consider UCITS funds to be a solid, reliable vehicle with very clear regulation. Achieving this success has required the commitment of European authorities, which, following recent financial crises, have intensified scrutiny over the role of redemptions in bond funds as a potential amplifier of market stress. In particular, they have emphasized the need to strengthen liquidity management tools and market-wide stress testing frameworks. But have they succeeded?
According to the latest study published by the European Fund and Asset Management Association (EFAMA), although there were periods of higher redemptions, the magnitude of outflows in corporate bond funds remained relatively contained during three recent and clearly distinct financial shocks. For EFAMA, the results of the study contradict concerns expressed by financial regulators and international institutions, such as the FSB, the ECB, and the ESRB, which have argued that corporate bond funds — especially those offering daily liquidity — may amplify market stress during periods of turbulence.
“These concerns are based on the theoretical belief that a potential mismatch between the liquidity of fund assets and investors’ redemption rights could trigger forced asset sales (fire sales) and greater financial instability. However, our data indicate that such scenarios did not materialize in practice. Even during periods of high market volatility, fund managers appeared able to meet investor redemptions without resorting to disruptive asset sales or experiencing severe liquidity stress,” states the latest Market Insights report titled “Fund redemptions in periods of shock: evidence from outflows in UCITS corporate bond funds.”
EFAMA’s experts reached this conclusion after conducting a comprehensive analysis of daily and monthly redemption patterns of listed European corporate bond funds during the three most recent financial shocks — COVID-19 in 2020, the interest rate hikes of 2022, and the tariff shock of 2025 — assessing whether the observed redemption levels could pose a material threat to financial stability.
“This analysis suggests that risk-based supervision is more effective than regulation in addressing potential liquidity mismatches in the fund sector. Rather than applying broad measures across the entire fund universe, it may be more effective to focus regulatory attention on specific groups of funds that are structurally more exposed to the risk of extreme outflows,” highlighted Federico Cupelli, Deputy Director of Regulatory Policy at EFAMA.
Following the evidence
The organization explains that the evidence suggests that, at least in the cases analyzed, corporate bond funds acted as relatively stable investment vehicles rather than becoming sources of systemic risk. For example, although the analysis shows that the largest monthly fund redemptions ranged between 3% and 6% of the previous month’s net assets across all observations, ESMA’s stress test scenarios assume redemptions of 22% in a single week. “These results invite a more nuanced view of the role of corporate bond funds in financial stability debates and suggest that current liquidity management practices are more robust than sometimes assumed,” EFAMA notes.
In fact, they argue that the entire debate about the role of bond funds should be framed within a broader context, as investment funds are not the only holders of bonds. “Other key players, such as central banks, banks, pension funds, insurers, and sovereign wealth funds — among others — represent a much larger share of fixed income holdings compared to investment funds,” they point out.
Finally, they emphasize that this analysis suggests that risk-based supervision is more effective than broad-based regulation in addressing potential liquidity mismatches in the fund sector. “Rather than applying broad measures across the entire fund universe, it may be more effective to focus regulatory attention on specific groups of funds that are structurally more exposed to the risk of extreme outflows,” they argue.
EFAMA’s proposal
Based on its previous analysis, EFAMA has identified several principles that supervisors should take into account when overseeing funds:
- The notion of liquidity mismatch used by supervisors to identify vulnerabilities in the fund sector is inappropriate. In their view, rather than examining how much investors can redeem over a given period according to the fund’s rules, supervisors should consider how much outflow volume a fund can reasonably expect based on its historical behavior.
Fund subcategories, such as investment grade and high-yield corporate bond funds, are not homogeneous categories. Therefore, they do not consider it appropriate to limit the analysis to their aggregate behavior (for example, by stating that “high-yield corporate bond funds exhibit structural liquidity mismatches”). “A more granular analysis is needed to identify those funds that are more vulnerable to liquidity shocks. Similarly, in top-down stress test scenarios, it is not appropriate to assume that all funds within a category will face similar levels of redemptions. Stress test exercises based on these assumptions are unlikely to accurately identify where vulnerabilities truly lie, if they exist,” they argue.
3. It is relatively rare for a fund to experience daily outflows exceeding 3%. “This means that, in most cases, asset managers do not face sudden and significant outflows that could trigger forced asset sales. Moreover, large outflows are usually driven by the exit of an institutional investor from the fund,” they explain. In such cases, they note that the investor is typically required to provide sufficient advance notice to the manager so that preparations can be made for the withdrawal. For this reason, persistent daily outflows above 3% could be an indication of stress in a fund and may warrant closer supervisory attention.
