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Cash & Liquidity Management
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A New Focus on Money Market Funds

by Chris Cheetham, CEO Halbis,  HSBC

Over the past couple of years, as a result of the turmoil in financial markets, investors’ attitude towards cash as an asset class has gone through a fundamental change. Before the liquidity crisis, cash was generally regarded as the least risky asset class, but events of the past eighteen months, in particular the drying-up of liquidity in money market instruments and the failure of a US-based money market fund in the wake of the Lehman bankruptcy, have served as a timely reminder to investors that cash is not risk free.

As a consequence, money market funds are currently under more scrutiny than ever before, and the onus is on managers to demonstrate that they have a robust investment strategy and process that will be effective in all kinds of market environments. Money market funds operate in a different way from other types of funds, as rather than concentrating on producing a return (often against a defined benchmark), their primary objective is to return capital to investors on demand, which means that their focus is the preservation of capital and the provision of liquidity, with yield as a secondary consideration. Of course there remains a risk that money market funds will not meet this primary objective, particularly when the market is in dislocation.