Finance Seminar Emanuel Mönch

Using equity mutual funds' holdings and transaction data, the paper shows that when short-term rates rise and monetary policy tightens, fund managers actively tilt portfolios toward high-beta stocks instead of reducing risk. This “reaching for beta” is persistent, fuels sector-wide buying of high-beta names, and helps funds attract inflows under tighter policy. Yet it lifts only raw returns, not risk-adjusted performance, and creates temporary price pressure in high-beta stocks that later reverts. The authors trace this to managers' career concerns: as investors shift toward safer alternatives when rates rise, managers counteract outflows by scaling up risk within their existing mandates.

The results point to a previously undocumented beta channel of monetary policy transmission, in contrast to the reaching-for-yield behavior documented in fixed income, where tighter policy typically reduces risk-taking.

Takeaway: Tighter monetary policy does not curb risk-taking among equity fund managers and can instead intensify it.