The $600 million in new assets that Horizon Cash Management captured in the third quarter could be a sign of things to come for the Chicago company and other cash managers.
Pauline Modjeski, the president of Horizon Cash Management, said that the main reason for the company's recent inflow of new monies is that institutional investors such as hedge funds, managed futures funds, and family offices are looking more closely at alternatives to the passive investment vehicles that they have previously used.
"They have witnessed the collapse of Lehman Brothers and the Reserve's Primary Fund having broken the buck," Ms. Modjeski said, referring to money fund manager Reserve Management Corp. of New York.
Horizon, which had $2.5 billion of assets under management as of Sept. 30 and handles 70 cash accounts, does not commingle client monies; instead it creates unique, separately managed accounts.
Clients "like knowing their monies are custodially protected, and they appreciative that we offer daily transparency — enabling them to know exactly what securities they own — rather than waiting for an end-of-month or end-of-quarter report," Ms. Modjeski said.
Rus Prince, the president of Prince & Associates Inc., an asset management consulting firm in Redding, Conn., said there will likely be more assets shifting to cash managers.
"Investing opportunities right now are limited, and these firms are pulling from other places," he said. "Both of these factors are contributing to these large numbers" at Horizon and other cash management firms.
Prime banks are not as secure as they used to be, and "with more money not as tied to the 'older guard' suppliers with more transparency will be picking up more of these assets," Mr. Prince said in an interview.
Brian Hamburger, the founder of MarketCounsel, an Englewood, N.J., firm that provides services for registered investment advisers, said, "It is not surprising that cash managers would see an increase in assets under management during these turbulent times, and $600 million in cash is not the equivalent revenue of $600 million in equities."
Ms. Modjeski said that the $600 million Horizon added last quarter was mainly in cash.
"For many of our clients, this cash represents trading capital. Thus, our first and foremost ambition is preservation of capital," she said.
Some of Horizon's recent asset growth has been organic — from existing clients increasing their cash reserves — but the company has also added clients that transferred their cash holdings from prime brokers or money market funds, Ms. Modjeski said.
She said that hedge fund providers have been hampered by investing their cash in money market funds. They have rarely looked at cash as a serious portfolio, but now they must, she said.
"The extraordinary volatility in the prime broker market has led many to examine the virtues of customized and individually managed cash accounts," Ms. Modjeski said.
Horizon will "stick to the basics and stay the course," Ms. Modjeski said. Since the company was founded in 1991 it has consistently preached the wisdom of active cash management, she said.
She said that Horizon does this by keeping excess cash — which for hedge funds and managed futures funds is really trading capital — separate and distinct from broker-dealers and clearing firms. Cash kept in separately managed accounts is custodially protected so as to avoid being frozen or subject to the claims of outside creditors.
Ms. Modjeski said Horizon traditionally invests in U.S. government Treasury and agency securities; commercial paper; reverse repurchase agreements; and other short-dated, money market-type securities. The company's clients are hedge funds, managed futures funds, family offices, and other institutional investors.
Horizon does not plan to go after the bank channel directly, Ms. Modjeski said. Its primary focus has been and will remain institutional clients and family offices that can benefit from having their cash holdings managed actively rather than passively.
"As a number of these prospects currently keep their cash reserves in money market funds or with prime brokers, our continued success will come with the migration of these funds to our custom-designed, individually managed portfolios," she said.
With continued market volatility, and hedge funds of all types holding larger portions of their portfolios in cash, Ms. Modjeski said she expects the inflows to continue.