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Capital Markets

Credit crisis: Enhanced cash funds rebut slurs

The credit crisis has forced US enhanced cash funds, which seek to better money market returns by taking on slightly higher levels of risk than regular money market funds, to fight to secure their reputation.

Enhanced cash managers say the failure of some funds that invested in relatively risky structured credit products has unjustifiably tainted the market segment.

"The negativity came out of misinformation from the media and a lack of education on the part of investors," says Bruce Bent, vice-chairman and president of New York-based investment company The Reserve, which runs an enhanced cash portfolio.

Alarm bells ring

In August, US cash management company Sentinel Management Group froze client withdrawals, stating that it could not meet redemptions without selling securities at deep discounts to their fair value. It subsequently filed for Chapter 11 bankruptcy protection. This set alarm bells ringing for money market and enhanced cash investors. However, Bent says Sentinel was very different from an enhanced cash fund. "It was basically a fund-registered investment pool. They were not investing in the philosophy of a ‘2a-7’-type strategy," he says.

US money market mutual funds are governed by SEC rule 2a-7, which permits them to invest only in low-credit-risk securities, such as short-term government debt, certificates of deposit and commercial paper of companies. The underlying securities must have a maturity of less than 13 months and the funds have to maintain a constant net asset value of one dollar per share, which means that for every dollar an investor puts in, they get a single share of the fund in return.

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