With redemptions reaching exceptionally high levels, mutual funds are hoarding cash like never before, BusinessWeek reports. Funds lost $68 billion in October and appear to be on track to top those losses this month. By comparison, in October 2007, mutual funds lost $11.3 billion and $9.94 billion the following month.
Year-to-date, funds have lost 3.3% of assets, a bit more than the 4.3% loss in the bear market of 2002-2003, according to TrimTabs Chief Operating Officer Conrad Gann. If todays redemptions reached that level, another $38 billion would easily leave mutual funds.
The volatility of the market is fueling much of those redemptions, forcing mutual fund portfolio managers to hold as much as 25% of their assets in cash, rather than the typical 3% to 6%. Not only does the high level of cash mean lost trading opportunities, but the high volume of selling to meet those redemptions is pushing up trading costs.
ReFlow Managementwhich loans funds cash for shares being redeemed for a fee of 15 to 17 basis points, in exchange for a 28-day period in which the fund can seek to redeem the shares in a daily Dutch auctionis seeing a large increase in business.
Year-to-date, the company has provided $800 million in capital to funds. To put that in context, between its launch in 2003 and the beginning of this year, ReFlow had provided $1.2 billion.
This environment is going to be much tougher, and people are going to look for every edge they can get, noted ReFlow President Paul Schaeffer.
Funds that are primarily sold through advisers who can allay investors fears, or to high-net-worth investors who are not in need of immediate cash, are reporting far lower redemption levels.