Sturm und Drang in money market funds: When money market funds cease to be narrow

• We investigate returns and investor flows of German money market funds.
• This study contributes to the regulatory debate on MMFs. We show that MMFs that report variable net asset values are not immune to large investor redemptions.
• We find that in liquid times MMFs enhanced returns by investing in riskier assets.
• This widened the narrow structure of MMFs and made them vulnerable to redemptions.
• When market liquidity declined during the crisis, illiquid funds experienced large redemptions while liquid funds continued to function as safe havens.

This paper investigates the returns and flows of German money market funds before and during the financial crisis of 2007/2008. The main finding of this paper is that, in liquid times, some money market funds (MMF) enhanced their returns by investing in riskier assets. By doing so they outperformed other MMFs, as long as liquidity in the market was high. Investing in riskier money market products, however, widens the typically narrow structure of MMFs and makes them vulnerable to withdrawals. When market liquidity declined during the subprime crisis, illiquid MMFs experienced withdrawals, while funds with safer and liquid portfolios functioned as a safe haven. As German MMFs calculate the value of their shares based on fluctuating net asset value, the findings inform the current debate on regulating MMFs.