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.

Successful cash management easily adds 25 basis points to a hedge fund’s annual return, says Ms. Mix: “In normal times this is icing on the cake, but in bad times it will keep the lights on.” Investors such as funds of funds should ask managers what is being done with the cash, she adds, and suggests to new managers that they calculate how much they can gain by paying more attention to extracting revenue from their cash balances.

Horizon runs a US$1 billion operation with 117 separate accounts, including cash portfolios for hedge funds. This smaller cash manager is more nimble compared to large money market funds. For example Ms. Mix can buy instruments such as Treasuries in small blocks and at different maturities.

She correctly predicted to this reporter the half-percentage cut several days ahead of the Federal Reserve announcement on Nov. 6. Ms. Mix has been in cash management since 1991, after having started in futures.