European Central Bank working paper links longer notice periods to lower March 2020 bond fund outflows and less cash hoarding

The European Central Bank published an ECB Working Paper examining whether redemption restrictions in open-ended bond funds reduce financial fragility, using the March 2020 COVID-19 market turmoil as a stress episode. The study finds that redemption restrictions, particularly redemption notice periods, are associated with smaller investor outflows in stress and less procyclical liquidity management by fund managers. Using supervisory reporting data for 2,174 bond funds under the Alternative Investment Fund Managers Directive (around EUR 1.2 trillion in assets), the analysis estimates that an additional week of notice period reduced first quarter 2020 outflows by roughly 1.3 percentage points and was not followed by higher outflows after the crisis episode. Funds with higher notice periods also engaged less in cash hoarding during March 2020, instead drawing down liquidity buffers, with one additional week of notice period associated with about a 2 percentage point larger reduction in cash holdings (relative to lagged total assets). Over 2016-Q1 to 2023-Q2, notice periods reduced the sensitivity of outflows to poor performance while not materially affecting inflows following good performance, whereas lock-up periods and reduced redemption frequency were generally not statistically significant in the reported specifications.