Cash is err, king

Lots of news recently that hedge funds are boosting their cash holdings.

FINalternatives reports:

Citigroup estimates that hedge funds have about 30% of their assets in cash, possibly their highest cash holdings ever. The bank said that hedge funds currently have about $600 billion in cash. Hedge funds held about 20% of their assets in cash prior to the outbreak of the credit crisis last year.

Meanwhile Merrill Lynch’s monthly global fund manager survey released yesterday showed a flight to cash - with 36 per cent of those surveyed net overweight on cash, compared with 34 per cent in August. The reason? They’re eschewing riskier assets like equities while seeking to meet increasing redemption requirements.

How safe is cash though, given that about 17 per cent of cash holdings are in money market funds, according to Citigroup.

With news of the $64.8bn Reserve Primary Fund breaking the buck, or falling below the level investors put in, those funds are starting to look a bit risky. That’s something decidely worrying, considering they were pitched to investors as safe - if not safer - than cash in the bank. Indeed, preventing a buck-break is so important that companies like Wachovia and Legg Mason have already poured billions into their MMFs to stop it happening. It takes surprisingly little to tip the funds over the brink - just $785m of exposure to Lehman Bros. defaulting commercial paper in Reserve Primary’s case.

As Sam notes in the previous post:

The real issue here though is the fear the collapse of LEH and Reserve Primary has created. If you were a money market fund - so absolutely sensitive to the tiniest changes in asset risk - would you be lending CP to Morgan Stanley or Goldman right now? Not likely.

There’s another impact here on the funds themselves. The whiff of MMF risk has already generated speculation there could be something of a run. Heightening the temptation to mass-exit, as Sean Corrigan at Diapason points out this morning, is the fact the funds carry no FDIC insurance. Maybe not that important given there’s a real possibility the FDIC could exhaust its own insurance line, but it certainly won’t help.