Cash is king again as money managers are in no rush to embrace risk with Fed raising rates

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Cash is king again as money managers are in no rush to embrace risk with Fed raising rates

Traders work on the floor of the New York Stock Exchange (NYSE) on October 07, 2022 in New York City.

Spencer Platt | Getty Images

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Cash, one of the most hated corners of the market for years, is being rediscovered by money managers as the Federal Reserve’s firm commitment to raising interest rates has upset nearly every other asset class.

Global money market funds saw inflows of $89 billion in the week ended Oct. 7, the largest weekly injection of liquidity since April 2020, according to data from Goldman Sachs’ trading desk. Meanwhile, mutual fund managers are also holding a record amount of cash, it says in the data.

Money managers rushed to the sidelines, anticipating more ugly moves for risky assets amid the Fed’s inflation war. Money market funds are also posting better returns than in previous years after government bond yields were boosted by rate hikes.

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Billionaire investor Ray Dalio recently said he’s changed his mind about his long-held belief that cash is garbage. Paul Tudor Jones shared this sentiment and saw value in cash even in the face of rising inflation

“I think he’s 100% right. It’s kind of a playbook that we’re in at this part of the cycle when central banks are aggressively trying to target inflation globally,” Jones said on CNBC’s “Squawk Box” earlier this week. “They would clearly prefer cash.”

Cash equivalents were the only major asset class, returning 0.5% in the third quarter, beating inflation for the first time since the second quarter of 2020 on a quarterly basis, according to Bank of America. That S&P500 suffered a 5% loss over the period, marking its worst third quarter since 2015.

Many on Wall Street believe the Fed’s bold action could plunge the economy into recession. The central bank is tightening monetary policy at the most aggressive pace since the 1980s.

“These are poignant circumstances that I have never faced in my career,” said James Rasteh, CIO of activist and event-driven hedge fund Coast Capital. “The Fed caused a meltdown and now it appears to have caused a meltdown… Many drivers of inflation are structural and therefore unresponsive to interest rates.”

Rasteh said his New York-based hedge fund “allocates capital sparingly and with great caution.” Coast’s engagement fund is up 7.6% year-to-date as it picked up unpopular stocks in Europe, according to a person familiar with returns.