Similarity and systemic risk in the network of mutual fund holdings

The network of US mutual funds is a heterogenous system and during GFC portfolios have become more diversified and less similar. We find that observed similarities are more likely than expected by chance and finite-size effects. Stress tests show that the real network is risky with respect to random scenarios to parity of portfolio diversification and that riskiness can be justified by hubs only partially. More generally, a systemic risk component originates from portfolio overlap independently of popular assets and diversification. We exploit deliberately simple random models that serve the purpose of performing a comparison of the observed similarities and measuring the effects of the topology and portfolio overlap on systemic fragility. Future work will be devoted to study realistic scenarios that take into account the actual availability of shares on the market as well as the the roles of the funds’ and companies’ sizes in shaping investment strategies and determining portfolio similarity.