Historically, money market funds enabled investors to achieve attractive returns while ensuring capital preservation and ample liquidity. However, with money market fund reform going into effect on October 14 – in addition to longer-term challenges – investors need to take a hard look at their cash management tools and determine what role money market funds and short-term cash alternatives should play in their portfolios.

What to Know about Money Market Fund Reform


The key changes will require institutional prime money market funds ‒ popular tools for pension funds, endowments and foundations ‒ to move from a fixed $1 net asset value (NAV) to a floating NAV, and adopt potential liquidity fees and redemption gates. These fees and gates will also apply to retail prime money market funds, used by individual investors; however, retail prime money market funds will be able to maintain a stable NAV. Government money market funds will retain a fixed $1 NAV and be free from liquidity fees and redemption gates.*

*The SEC's reforms create a distinction between "retail" prime and municipal money market funds, which can be held only by individual investors and "institutional" prime and municipal funds, which can be held by a broader range of investors, including corporations and pension plans.

What it Means for the Market: Shifting Money Market Assets


Unlike prime money market funds, U.S. government money market funds will retain a stable $1 NAV and not impose liquidity fees and redemption gates, making them a potentially more appealing liquidity vehicle for both institutional and retail investors. In fact, more than $700 billion in assets under management has already moved into U.S. government money market funds, and the flow of assets is likely to continue in the coming months. The demand for high quality, front-end government securities is likely to increase if this shift continues.

What it Means for Investors: Heightening Pressure on Already Low Yields


Money market funds currently yield close to zero – a trend that is likely to continue over the longer-term. This is due to a multitude of influences, including extremely low yields in the U.S. and the increasingly limited supply of investable high-quality, short-term securities. Importantly, investors need to be aware of the impacts of inflation on their short-term holdings. For the last seven years, money market fund yields have not kept up with inflation and real (after inflation) money market yields are expected to remain negative going forward.

Why Investors Should Consider Short-Term Cash Alternatives


Even after money market reform takes effect on October 14, the key challenge lies ahead – namely how to preserve capital and protect purchasing power by earning returns above inflation on your cash holdings.

Actively managed short-duration strategies may be better positioned to enhance yield without sacrificing capital preservation in the current environment and over the longer-term. These strategies have the flexibility to actively invest in a range of high-quality short-term instruments and can target opportunities that are just outside the scope of the investable universe of regulated money market funds, which may offer the advantage of higher real return potential.

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