In the U.S., investors have also increased liquidity buffers to manage ongoing cash needs.
Total net institutional assets in money market funds increased to $3.2 trillion as of May 6, from $2.3 trillion as of March 4, according to Investment Company Institute data. Federated Hermes Inc.'s money market accounts rose by $55.8 billion in the first quarter, compared to $36.2 billion in the fourth quarter of 2019. The firm's money market AUM was up $132.9 billion over the 12 months ended March 31, to $451.3 billion.
Plan executives' worries of a liquidity squeeze stem from cash collateral requirements on derivatives transactions as well as foreign-exchange losses from hedging that investors with high overseas exposures experienced in March. Almost all pension fund clients have more cash now than before the crisis, said Robert Wayne Fitzgibbon, partner and senior investment consultant at Mercer Ltd. in London, who noted that pension funds realized in March that they shouldn't be sanguine about access to collateral that was more easily available prior to the crisis.
Jan Ritter, head of hedging and treasury at the 889.5 billion Danish kroner ($130.8 billion) ATP, Hilleroed, Denmark, said: "The large volatility in market prices provoked a large increase in margin calls." Cash is required to be posted as collateral for initial and variation margin to cover the credit risk in derivatives trades under central clearing requirements of the European Markets Infrastructure Regulation and the U.S.'s Dodd-Frank Wall Street Reform and Consumer Protection Act. Both were implemented after the global financial crisis.
When margin calls increase as a result of losses, settling derivatives trades requires investors to post additional cash. For this reason, ATP bumped up its cash reserves as a guard against the different margin calls, Mr. Ritter said, declining to specify the size of the increase.
He added that investors have had to think about the right amount of cash to be available in all relevant currencies. "It's a problem if your margin call is in dollars and you only have euros at your disposal," he said. "Our cash buffers are in different currencies."
Other sources said that losses from settling foreign-exchange hedging cost U.K. investors millions of pounds during the height of the COVID-19 crisis when the pound sterling fell 12% against the dollar between March 10 and March 20 to $1.15 — and investors had to settle FX losses using cash.
In the U.K. "schemes bought a lot of oversees assets, but FX hedges have gone down in value due to the pound depreciating — they had big P&L losses that needed to be settled," said Jos Vermeulen, head of solution design at Insight Investment Management Ltd. in London. Insight managed about £498.5 billion as of March 31. The pound sterling climbed to $1.21 on May 15.
To alleviate the pressure from those derivatives trades that were draining cash, some investors have reduced foreign-exchange exposures instead. AP1's Mr. Angberg said: "As FX-hedging in the derivatives market puts stress on cash positions, the fund has allocated more to Swedish assets, reducing foreign exposure by about 5%." Non-Swedish equities constitute 25.8% of the fund's asset allocation. Assets in non-Swedish investment-grade bonds were not disclosed.