What is a Money Market Hedge?

Written by justine bayod espoz
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What is a Money Market Hedge?
Money market instruments are considered less risky investment options. (investment image by Kit Wai Chan from Fotolia.com)

Historically, a money market account has been considered an attractive option for investors as it earns higher interest rates than savings or current accounts. Additionally, as of 2008, the government has begun guaranteeing money market accounts. Yet, despite their relative stability, it is important that investors understand what a money market hedge fund is and seek the advice of a financial consultant before opening an account.

What is a Money Market?

The money market trades highly liquid financial instruments that specialise in short-term borrowing and lending. These financial instruments have maturities that range from less than 30 days to less than one year, such as bankers' acceptance, certificates of deposit and commercial paper. Money market instruments are considered a safe option to store cash since they are associated with low risks. However, low risks usually mean that the returns on money market instruments are also low.

Unlike stock exchanges, the money market does not have one fixed physical location. In addition, money markets are largely unregulated and informal.

What is a Hedge Fund?

A hedge fund is a private investment fund that generates complex, sometimes unconventional investment strategies that can, for example, profit in times of market volatility or recession. In contrast to regular investment funds, which are usually limited to simply purchasing instruments, hedge funds also have the ability to sell. Thus, they are primarily organised as limited partnerships.

There are many different types of hedge funds, which may vary a great deal in terms of investment returns, volatility and risk. For example, a money market hedge fund values low risk over returns. Indeed, it may be that increasing returns are not even the main objective of the hedge fund. Many hedge funds value consistency of returns over quantity of returns. As such, it is a myth that hedge funds are risky investments.

What is a Money Market Hedge Fund?

A money market hedge fund is a type of hedge fund that mainly consists of borrowing and lending in multiple currencies. This process eliminates currency risk by locking in the value of a foreign currency transaction in the currency of the country in which the transaction is taking place.

Money Market Hedge Fund Advantages

One advantage of a money market hedge fund over a savings account is that no minimum deposit is required. Also, hedge fund interest rates and liquidity are generally higher than that of savings accounts. Plus, the money market is probably one of the safest places to invest capital.

Money Market Hedge Fund Disadvantages

The main disadvantage to a money market hedge fund is that it does not earn much return (though still more than a savings account). While it is true that investors have easy access to their accounts, this may be a disadvantage for those trying to save money. Finally, money market accounts may represent a potential loss of investment since you are only insured by the FDIC for up to the legal limit of £162,500.

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