Lehman collapse raises questions for money market funds

In the US, the money market fund sector has been rocked by reports that one of the oldest and biggest funds is in trouble.

On Tuesday the Reserve Primary Fund ‘broke the buck’, which means its share price fell below $1. This is never supposed to happen to a fund designed to be a safe haven for cash.

Fears that problems may spread to other funds in the sector have now subsided, after providers moved quickly to reassure investors.

Investors began to bale out of the Reserve fund, which had around $60 billion in assets at the end of last week, because of concerns that it held commercial paper issued by Lehman Brothers as well as simpler, more traditional cash instruments.

By Tuesday the fund had lost around two thirds of its assets and there was a growing threat that investors would exit the sector en masse.

That threat now looks to have been averted. But could a similar situation arise in the UK?

Mark Dampier of Hargreaves Lansdown believes not, partly because relatively few UK investors have been drawn to these types of funds.

‘Money market funds have never really taken off here,’ Dampier said.

Building societies have always been the cornerstone of most investors’ allocation to cash, he said. ‘Money market funds are not as mainstream here, because they’re not really understood.’

Dampier said it was important to distinguish between two types of money market funds: investment and treasury. The investment type of money market funds are not guaranteed, offer higher yield but are higher risk, he said. These funds may hold short term commercial paper and other debt instruments, while the treasury variety is simply pure cash instruments such as loans and deposits.