money market funds mystery

[econberkeley]

 $2.6 Trillion is invested in money market funds in U.S returning average 0.01%. Why are people investing in these risky funds for basically no return? I am laughing at the emails from my brokerage telling me to move my cash to high returning??? mm funds. It is ridiculous. Any good explanation for such explained behavior?

[Kriegsspiel]

They're old.
Dry powder.
Stabilizing the portfolio.
The lower half of a barbell.
They are rich enough that they don't need to risk their money anymore.
Proxy for a savings account.
Letting dividends and interest sit there while they use it throughout a quarter.
They take their risks with other assets.

I'm sure there are more reasons, those are just the ones I could come up with in about 60 seconds.

[superannuationfreak]

I'd call it "behavioral stickiness", thought there's probably an official term in the literature.

Most people don't continuously optimize.  In the past money market accounts did give better returns than at-call bank accounts.  With the rise of ING and other online savings accounts, this doesn't appear to be the case now.  But it takes at least a small amount of effort to make changes to a banking setup and so people often don't do it.  I'd guess this would particularly be the case with people who are uncomfortable with online savings accounts and other 'new' things.

I'd expect it to change over time as demographics/generations change but perhaps people have learnt behaviors from their families too?

[huadpe]

$2.6 Trillion is invested in money market funds in U.S returning average 0.01%. Why are people investing in these risky funds for basically no return? I am laughing at the emails from my brokerage telling me to move my cash to high returning??? mm funds. It is ridiculous. Any good explanation for such explained behavior?

Because a MMA account has specified underlying assets unlike a bank account which is just a big loan to a single bank above $250,000

[fiveoclockshadow]

What huadpe said.  If you are Microsoft with cash on hand of $77B or Apple at $137B those are well above the $250K FDIC limit ;)

Corporations often hold lots of cash and a bank is the wrong place to hold it for a variety of reasons. That's what MM accounts provide. Google and you'll find the details.

[neoptolemus412]

the big players are funds & institutional investors.  It's very difficult to put $100m into a cash account.  Most banks want collateral and take time to come up with transfers.  It's not like going to your local bank and taking out $100.  If it's a mutual  fund, they want the liquidity.  Most funds keep a MM position that they can liquidate when necessary.  If you read  the prospectus of any index fund you own, most likely they are keeping a MM position.  So when you have $1 billion, a .01% MM is a great way to park money instead of having a liquidity crisis on your hands due to market conditions.

Also, companies don't have cash accounts they just access.  Microsoft & apple hold the majority of their cash overseas (us government would tax it if they repatriated it).  They put this money to use in secure Tbills or short-term liquid assets.  When you see cash on a fortune 500 balance sheet, it's rarely just cash.