Federated Investors has joined Bank of America in investing its own funds in a short-term fund to prevent investors from suffering losses. While BofA’s salvage operation is estimated to have cost as much as $600 million, the damage to Federated has not yet been disclosed.
Note that the fund in question is an enhanced cash product, sold to high net worth individuals and institutions, which was taking more risk to generate higher returns. It is not a retail market money market fund, which are subject to tighter regulations and have a strong investor expectation that principal is not in jeopardy. By contrast, the investors in cash management funds are grownups who presumably understood they were investing in a higher risk product. In keeping, the managers aren’t always putting in their own capital to shore up the funds. As discussed earlier, General Electric did not, instead letting investors take losses; the Bloomberg article quoted below mentions some other funds that have “broken the buck” where the operators haven’t announced any plans to top the funds back up.
From Bloomberg:
Federated Investors Inc., the third- largest manager of money-market accounts in the U.S., bailed out its Enhanced Reserve cash fund as declines in mortgage-backed securities caused the credit markets to seize up.
Federated allowed clients to withdraw their money without losses, spokeswoman Lindsy Kollar said. She wouldn’t disclose the size of the fund or the amount or cause of the losses. The Pittsburgh-based company wrote down $4.9 million of its $5 million investment in Enhanced Reserve, a partnership open only to accredited investors, according to a regulatory filing.
Enhanced cash funds, which hold about $850 billion in assets in the U.S., are sold to wealthy investors and institutions as an alternative to money-market funds, offering higher yields by buying riskier assets such as mortgage-backed securities. Rising defaults on home loans to borrowers with poor credit have caused losses among short-term bond funds and enhanced cash products that invested in lower-rated securities….
Kollar of Federated said “there were no subprime or credit-quality issues, no downgrades or defaults” in its enhanced cash fund…..
Enhanced cash funds gained in popularity in 2003 when interest rates plummeted to their lowest in almost five decades and the average net yield on money-market funds fell to less than 1 percent. As rates began rising in 2004, the attraction of enhanced cash funds has fallen, according to Krieg.
Bear Stearns Cos.’ Enhanced Income Fund has slipped below its $1 net asset value, trading at 99 cents on the dollar, according to data compiled by Bloomberg. Russell Sherman, a spokesman for New York-based Bear Stearns, didn’t return a call seeking comment.
General Electric Co.’s GEAM Trust Enhanced Cash Trust, an enhanced cash fund, returned $600 million to investors at 96 cents on the dollar this month after losing $225 million, mostly in mortgage-backed securities.
