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

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Cash, one of the most hated corners of the market for years, is getting some newfound love from money managers as the Federal Reserve’s firm commitment to rate hikes roiled nearly every other asset class.

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

Asset managers rushed to the sidelines as they expect more ugly moves for risk assets amid the Fed’s inflation fight. Money market funds are also yielding better returns than previous years after Treasury yields got pushed up by rate hikes.

Billionaire investor Ray Dalio recently said he’s changed his mind about his long-held belief that cash is trash. Paul Tudor Jones also echoed the sentiment, seeing value for cash even in the face of surging inflation

“I think he’s 100% right. That’s kind of the playbook that we are in at this part of the cycle when central banks are aggressively trying to attack inflation globally,” Jones said on CNBC’s “Squawk Box” earlier this week. “You would unequivocally want to favor cash.”

Cash equivalents were the only major asset class that gained in the third quarter with a 0.5% return, outpacing inflation for the first time on a quarterly basis since the second quarter of 2020, according to Bank of America. The S&P 500 suffered a 5% loss for the period, marking its worst third quarter since 2015.

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

“It’s a grievous set of circumstances that I’ve ever seen over the course of my career,” said James Rasteh, CIO of activist and event-driven hedge fund Coast Capital. “The Fed created a melt-up and now it seems that they created a melt-down… A lot of drivers of inflation are structural, and therefore not responsive to interest rates.”

Rasteh said his New York based hedge fund is “allocating capital sparingly and with great caution.” Coast’s Engaged fund is up 7.6% year to date as they picked up out-of-favor value names in Europe, according to a person familiar with the returns.