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Funds of Funds and Consultants Seek Better Returns

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NEW YORK (–Faced with continuing low interest rates, players in the hedge fund industry have become more focused on trying to improve earnings on their cash balances.

Money market mutual fund returns have fallen drastically in recent years and assets in these funds have shrunk. In addition to the challenge posed by near-bottom rates, market opportunities are not as strong as they have been. Investors who previously did not pay much attention to cash are concerned.

“People are seriously looking at alternatives to the money markets,” says Annette Cazenave of Horizon Cash Management in Chicago, an active cash manager with more than US$1.4 billion in assets. “We’ve been getting calls from new segments within the market space. What was a non-priority before has become a priority.”


Earlier this year, funds of funds started inquiring about cash management. Fund of funds can hold substantial balances that they haven’t yet committed or are keeping as a cushion to meet withdrawals and other demands.

Now consultants and advisers are trying to help their clients do better with cash. “We’re working with them to see how we might fit their needs, in terms of structure and what not,” said Ms. Cazenave.

Judging from its most recent announcement, the Federal Reserve is not inclined to spring a surprise by nudging up interest rates in the near future, so this environment is expected to continue for a while. That raises the question of whether cash managers will be able to continue squeezing returns from liquid funds. The Horizon team might have to dig deeper to find opportunities.

“We are holding a spread over the 90-day treasury,” Ms. Cazenave replied to a query regarding this problem. “This is due to customized, active liquidity management and a very thorough and experienced portfolio team that, on a daily basis, captures every opportunity within our clients’ guidelines.”

She does not think Horizon’s cash management strategy will hit a capacity constraint any time soon, in large part because this manager invests in markets that are deep and highly liquid. The firm also has built a scalable infrastructure to handle many individual accounts.

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