NEW YORK (HedgeWorld)–At a time when many hedge funds are holding record levels of cash and consequently are more dependent than ever on money market earnings, Federal Reserve policymakers reduced already-low rates by an aggressive half-percentage point. Squeezing revenue from cash holdings becomes an essential issue for managers as interest rates get close to zero.
“They have to manage not just the trading portion of their portfolios but also the cash,” says Diane Mix of Chicago-based Horizon Cash Management. To put the cash in a money market fund is dangerous right now, she explains–money market rates were at record lows even before this Fed cut.
Ms. Mix described as “uncharted territory” the current combination of large hedge fund cash balances, shrinking returns on these balances, and overall hedge industry performance that is weak compared to the past. Holding cash is a risk management tool for all investors in turbulent markets, she stresses. The mistake, especially now, is to ignore that part of the portfolio.