Cash investment boutique Capital Advisors recently released a whitepaper entitled, "How Safe Are Prime Money Market Funds?", which asks, "Are prime funds getting safer?" and "Are all prime funds alike?" It says, "The general risk profile of the large prime fund group has improved since our last [April 2006] publication. The average fund now has better liquidity, better credit quality and lower structural complexity. Weighted average maturity (WAM) risk, however, is on the rise. There is wide dispersion among funds in each of the major risk categories. Investors can choose from various funds if they are concerned with certain risks." The introduction states, "[T]his class of funds has been the focus of heightened concern for institutional investors. Significant credit events that have affected money market funds include troubles with subprime mortgage issuers, the disintegration of structured investment vehicles (SIVs), widespread downgrades of AAA-rated bond guarantors, a seized-up short term credit market, and a mass exodus from prime funds in the days after the Reserve Primary Fund's net asset value (NAV) fell below the constant $1.00 share price. For this updated paper, we seek to answer how the risk behaviors of large prime money market funds have changed since the Reserve Primary event in September 2008; and how these behaviors differ from fund to fund. Based on empirical data from the fund industry and our own fundamental analysis, we hope this postmortem will help investors identify the evolving risk management necessities of prime money fund due diligence."
