Uncovering Hidden Risks in Cash Portfolios

Over much the last decade, supposedly conservative cash investors steadily increasing their risk appetite was a widespread phenomenon. Recent credit developments in the mortgage and debt markets helped raise risk awareness levels. This paper summarizes the risk behavior of corporate cash and money market fund managers into eight broad categories. Corporate investors are advised to check for these potholes as an ongoing exercise. The eight potholes to avoid are: overconfidence in credit ratings, risks masked by securitisation, hidden financial leverage, exotic repurchase agreements, extendible securities, structured notes, speculative use of credit derivatives, and hedge funds.