Cash mountain brings both hope and difficulty

By Jeremy Gaunt - Analysis

LONDON (Reuters) - A mountain of cash sits on the edge of financial markets, waiting to tip in when confidence is restored in riskier assets. For investors, this is both an opportunity and a problem.

While it brings hope to those banking on a sharp reversal in investments later this year -- those looking for a V-shaped economic and market recovery -- it is also causing difficulties because money is not being put to work.

"Basically, what we are seeing is hoarding of liquidity," said John Stopford, head of fixed income at Investec Asset Management. "It's distorting pricing. It's a problem."

Plenty of evidence exists to show investors stocking up on huge levels of safe-haven cash in the face of credit market gyrations, a worsening global economic outlook and volatile financial markets.

The latest Reuters asset allocation polls, for example, show leading international investment firms holding some 5.9 percent of their mixed-asset portfolios in cash. It compares with a long-term average of 4.5 percent.

A steady move into cash is also seen in Merrill Lynch's monthly poll of fund managers. Some 51 percent were overweight in cash in March, compared with 48 percent in February and 43 percent in January.

Flow data from fund researcher EPFR Global quantifies the trend. It shows a net $140.9 billion flowing into money market funds in the first quarter. To put this in context, developed market equities saw outflows of $69 billion.

Speakers at this week's Reuters Hedge Funds and Private Equity Summit went further, indicating that the cash hoarding may be far more widespread than just in traditional fund management firms.

Bill Maldonado, head of alternative investments at HSBC Halbis Capital Management, said that cash was building up at investment bank departments that lend money to hedge funds.

"What we hear and see anecdotally is that the prime brokers are sitting on the biggest ever cash balances," he said.

Simon Walker, head of the British Private Equity and Venture Capital Association, meanwhile, said private equity funds are also sitting on a cash pile, waiting to either buy new companies or beef up those they already own.

GOOD CASH, BAD CASH

The positive side for investors is that this cash is generally not tied up and can quickly be churned into new investment when the time is right.

It is already happening on a selective basis.

"We have a lot of powder we've kept dry," Bernard Oppetit, chairman and chief executive of hedge fund Centaurus Capital, told the Reuters summit. It was to be used, he added, for opportunities that would crop up in the credit market.  Continued...