The Problem With Cash


Monetary policy since 2007 has played a unique role in the way both institutional investors and corporations invest. The Federal Reserve’s low interest rate environment has spurred volatility in currency hedging operations and has also killed any hopes of generating significant, low-risk yield with extra cash a company may have on its books.

For instance, as of last week, Apple Inc. had $98 billion of cash on hand, which is expected to hit the $100 billion mark by Q2 of 2012. There’s also plenty of hedge funds, asset management firms, and pension systems that have significant quantities of cash on hand with no idea what to do with it.

At a time when Treasury yields are going negative on occasion (paying the U.S. government for the privilege of storing money in a de facto safe haven), Ben Bernanke recently assured investors indirectly that the Fed would not be raising rates until at least 2014, marking a continuation of the current interest rate environment. It almost appears as if we’ve entered a perpetual state of quantitative easing.

As a result, 2012 looks to be a year where institutions ramp up allocations to alternative investments and hedge funds as they desperately clamor for decent returns. “The current ‘risk on’ environment makes storing money in Treasuries sort of a waste,” noted one institutional trader. “You’ll see a lot of tough choices being made very soon in regards to how fund managers and institutions will allocate their capital.”

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