The media tends to over-hype news. Things are presented as better than they really are in good times and worse than reality in bad times. Recent worries about money market funds that have invested in subprime mortgage-backed securities are just one example. There has been speculation that small investors face the possibility of losing significant amounts of money in their money market investments, despite the appearance of such funds as being very low risk in nature.
Yesterday we learned that in fact Bank of America (BAC) was shutting down a $34 billion money market fund. The headlines were grim, but once one actually reads the facts of the situation, it is apparent that it is no big deal at all.
First of all, the fund in question is not a typical money market fund. It was an "enhanced" fund that knowingly took on more risk than the average money fund, hence the subprime exposure. As a result, only institutions were allowed to invest (since they understood the risks were greater) and the minimum investment was $25 million, so individual investors are not exposed.
Secondly, and more importantly, the losses the fund sustained before being shut down by BofA were barely noticeable. Investors in the fund were able to redeem their shares at a rate of 99.4 cents on the dollar. That's right, despite the gloomy headlines in the media, investors in this risky fund lost less than 1 percent of their original investment. And this fund was risky!
So for all of you out there who are spooked about money market funds, perhaps this data point can ease your concerns.
Full Disclosure: Long shares of Bank of America at the time of writing
Tuesday, December 11, 2007
Keep Money Market Fund Worries in Perspective
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The content contained in this blog represents the opinions of Mr. Brand. Mr. Brand may hold long or short positions in the securities discussed in this blog, but such positions will be disclosed. All of the information contained on this site is believed to be accurate when published, but mistakes could inadvertently be made.
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