Alarming markets give cash cachet
Bracing for worst, big investors seek safety in liquidity
In the run-up to this week’s jagged stock ride, many large investors were preparing for the worst by stashing away cash.
On Beacon Hill, deputy state treasurer James MacDonald, who oversees $8.5 billion in cash accounts for the Commonwealth and 295 Massachusetts cities and towns, started worrying weeks ago about Washington lawmakers’ inability to strike a deal on the US debt ceiling. On July 27, days before Congress’s deadline, he had managers raise the safest holdings in the short-term fund he watches over to 20 percent - double the required amount.
“Nobody knew what was going to happen,’’ MacDonald said. “We just took that as a planning measure, just to have some additional liquidity.’’
As it turned out, investors were more alarmed about the global economy than the United States losing its AAA debt rating. Standard & Poor’s downgrade of US debt a week ago ended up leaving bonds unscathed, while stocks staggered before recovering Thursday and yesterday. Early in the week, MacDonald said, he followed the markets “almost hour by hour.’’
Many large investors have been taking money out of stocks and riskier assets and moving it into cash and the safest, cash-like securities.
By late last month, George Soros, the major hedge fund manager, had moved 75 percent of his $25.5 billion Quantum Edowment Fund into cash. Other hedge funds also have been stocking up on cash and bonds, according to firms that track their holdings.
“In an effort to reduce risk, investors are piling into government bonds and selling risk assets, such as equities and commodities,’’ said Charles Gradante, co-founder of Hennessee Group, an adviser to hedge funds.
He cited a “massive de-risking’’ by hedge funds so far in August, meaning they have moved into safer bond and cash investments and hedged their stock losses, by betting certain stocks would fall. Grandante said hedge funds have been reacting more to negative global economic news than to the S&P debt downgrade.
Businesses also have been conserving cash, taking a more cautious position than they did in the financial crisis of 2008, when many companies, nonprofits, and individuals had money tied up as the credit markets froze. According to Standard & Poor’s, corporations are sitting on $2 trillion in cash. The largest Massachusetts companies, excluding banks, had $35.3 billion in cash at the end of the second quarter - $9 billion more than in the third quarter of 2008.
Cubist Pharmaceuticals Inc., a Lexington drug maker, had one of the largest increases in cash during the second quarter, thanks in part to a bond offering. The company has more than doubled its cash and short-term investments to just over $1 billion since the end of 2008.
David McGirr, Cubist’s chief financial officer, said the company is generally hanging on to cash so it can make acquisitions. But in the current financial environment, it’s also reassuring.
“When there is uncertainty and volatility in the market, having a little bit of extra cash is more comfortable,’’ McGirr said.
Nationwide, investors large and small have come rushing back into money market funds after fleeing them in the week leading up to the debt ceiling deal. More than $61 billion flowed into the funds in the week ended Tuesday, the most since July 2008, according to iMoneyNet in Westborough.
Meanwhile, large institutional investors that aimed to avoid any shred of risk from government bonds stockpiled cash in bank accounts: Banking giant Bank of New York Mellon Corp. a week ago said it would charge higher fees on accounts bulging with more than $50 million in cash.
Tom Manning, president and investment chief at Silver Bridge Investment Solutions Group in Boston, said high-net-worth clients are being more cautious than they were in 2008.
“Many investors have been looking at the markets a little more conservatively than they did in 2008 and have never quite gotten quite back to the comfort level they had prior to that,’’ Manning said.
Beth Healy can be reached at email@example.com.