Hedge funds move $100bn into safe havens

Hedge funds charging hefty fees for sophisticated trading strategies aimed at outperforming the wider market have collectively parked $100bn in simple money market funds typically used by investors seeking safe rather than spectacular returns.

Citigroup estimates that hedge funds have now placed $600bn in cash, and that $100bn of this is held in money market funds, normally seen as some of the safest places to invest cash.

However, last week, those money funds became embroiled in the wider financial crisis to the point that the US Treasury was forced to offer a blanket guarantee on them as part of its attempts to prevent the spillover of the financial crisis into the $3,400bn sector.

The extreme measures taken by the Treasury followed mounting fears that retail investors in the sector could be starting to panic and might withdraw funds on a large scale.

But some analysts say the extent of hedge fund investment in money market funds shows how scarce attractive investment opportunities and safe havens have become.

Pauline Modieski, president of Horizon Cash Management, a specialist cash manager, said: “In many cases there is effectively no daily transparency in money market funds. Surely investors as sophisticated as hedge funds should be asking if their cash is in a separately managed account or, as seems to be the case with these large allocations to money markets, a comingled account where the hedge fund has little or no control or knowledge of the underlying holdings on the money fund.”

In what analysts expect to be the first in a wave of potential lawsuits against money funds, Third Avenue Institutional International Value Fund, a fund of Third Avenue Management, a New York hedge fund, has filed a class action against The Reserve Management Company of New York.

The Reserve, meanwhile, last Friday filed with the Securities and Exchange Commission to suspend all of its redemptions and postpone the distribution date of payments for a period longer than seven days.

US mutual fund managers are also holding near to record levels of cash. The average actively managed stock fund has 5.4 per cent of its portfolio in cash, according to Morningstar. That is marginally below the record of 5.5 per cent at the end of 2007.

Additional reporting by Deborah Brewster in New York