Enhanced cash funds vs. money market funds

There has been some amount of press coverage concerning problems with enhanced cash funds. In particular, failure to be able to fully redeem cash from such funds due to liquidity problems with asset backed securities. Sometimes people ignorantly or misguidedly or even intentionally "suggest" that enhanced cash funds are the same as money market funds and that money market funds may have the same problems, but it simply isn't true. Yes, there are some similarities, but beyond the superficial, the two types of funds are significantly different. The basic difference is that there are strict SEC regulations on what can go in money market funds while investors in enhanced cash funds are not offered similar protections.

Now, to be clear, even retail money market funds can have some amount of exposure to asset-backed securities, typically in the form of short-term commercial paper and so-called medium-term notes (originally medium-term when issued but acquired by the fund as it nears its maturity date and is effectively short-term), but again under the SEC regulations and not with the large scale exposure to mortgages typical of institutional enhanced cash funds. Typically, commercial paper in money market funds matures within 30 to 90 days.

No doubt there are and will be some retail money market funds that get into some trouble, but not on the same scale as the institutional enhanced cash funds, where even there the problems are relatively limited and frequently the investors are bailed out and made whole.

Bloomberg has an informative article on recent problems entitled "Federated Investors Bails Out Cash Fund After Losses" that also explains some of the differences.

-- Jack Krupansky