In particular, equity hedge funds have been building up cash reserves. Merrill Lynch’s March fund manager survey revealed the highest cash positions relative to margin debt since 2003. Survey respondents were less aggressively overweight in April, but still overweight.
In part, the build-up of cash is attributed to deleveraging by several funds. For certain strategies, cash is being built up ready to deploy when new opportunities in distressed assets arise. Some managers are simply liquidating positions while they wait for the markets to become less volatile.
Where this cash is held is becoming an increasingly important decision for managers. Over the past five years, there has been a trend to take cash out of prime brokers’ hands and put it into the coffers of independent cash managers. This trend has accelerated since the credit crunch as managers have become fearful that their prime brokers will seize the cash to meet margin requirements. "From a defensive standpoint, managers want to avoid the risk of a cash grab if there is a disagreement on margin calls and pricing issues. They want more control over that money," says Bob von Halle, managing partner and director of business development at Horizon Cash Management.
