Are individual investors becoming more likely to cash out during periods of stress? A new note from the Federal Reserve Bank of Boston finds that “retail,” or individual, everyday investors, in prime money market funds reacted with greater “sensitivity” following the COVID-19 financial crisis, compared to the 2008 Global Financial Crisis.

That means they were more likely to “run” on a fund – or quickly liquidate their investment for cash – in 2020 than in 2008.

“Retail investors in prime money market funds may be getting increasingly more reactive, and that’s something we need to consider when we think about potential financial stability vulnerabilities,” said coauthor Kenechukwu Anadu, a vice president in the Boston Fed’s Supervision, Regulation & Credit department.

How are “institutional” and “retail” funds evolving?

The note by the Supervisory Research and Analysis Unit is called, “Are retail prime money market fund investors increasingly more sensitive to stress events?” Anadu coauthored it with the Boston Fed’s John Levin, Lina Lu, and Antoine Malfroy-Camine, and Nico Oefele from the University of Western Australia.

Money market funds, or MMFs, typically aim to maintain a stable or near-stable “net asset value,” or per-share price, of $1. Prime money market funds invest in private short-term assets that carry credit risk, such as commercial paper.

While individual investors are typically called retail investors, corporations and financial institutions are called “institutional investors.” Following significant runs in institutional prime money market funds during the 2008 and 2020 financial crises, the U.S. Securities and Exchange Commission issued reforms aimed at increasing the resilience of prime money market funds.

For example, in 2014, the SEC adopted a “floating” net asset value requirement for institutional prime funds, rather than a stable one. During the 2008 and 2020 financial crises, institutional investors pulled out their money en masse from institutional prime money market funds since they feared that their net asset value, or NAV, might fall below $1. These redemptions amplified strains in the short-term funding markets – a key source of funding for businesses, the authors said. By eliminating this fixed $1 per-share price, the SEC sought to reduce the risk of investor panic that a fund could “break-the-buck.”

However, the floating net asset value reforms did not apply to prime funds held by retail investors, which experienced significantly fewer redemptions in 2008 than institutional prime funds.

Retail investors appear more reactive to financial crises

The authors used data from iMoneyNet to analyze the daily net flows of money in and out of prime funds from Jan. 1, 2007 – Dec. 31, 2023. They used regression analysis – a statistical method that analyzes how one variable responds to another – to study how retail and institutional investors responded to the 2008 and 2020 crises.

They found that institutional investors responded similarly to both events: Institutional prime funds saw large “cumulative net outflows,” or overall declines in assets, of close to 30% as investors fled. But retail investors responded differently in each crisis: In 2008, retail prime funds saw cumulative outflows of about 4% of their assets. But in 2020, that number grew to 9%.

These outflows are significantly smaller than those from institutional investors, the authors said. Still, the analysis does show that retail investors are becoming more reactive in a crisis.

Anadu said there could be many explanations for these results, including that all money market fund investors have more access to information about their funds now than they did 15 – 20 years ago. In 2008, updates about a fund’s holdings were reported quarterly, he said. Now, following the SEC reforms, that information is reported more frequently.

Anadu added that even though retail redemptions from prime funds are nowhere near the size of institutional investor redemptions, it’s important to see how retail investor behavior is evolving.

“If retail investors are becoming more reactive to stressful events, then they may be more likely to run in the future – similar to what we saw institutional investors do in previous crises,” he said. “That’s something to be mindful of from a financial-stability perspective.”

Read the full note on bostonfed.org.