Losses in French Money Market Funds Could Have Been Foreseen

Riskdata has analysed the performance of 2,000 funds on the French money markets with total assets under management of €1.368 trillion (thus covering most of the volume of the French funds market, which is €1.6 trillion according to AMF data). The funds studied were grouped into categories based on their stated strategy (using the categories of the major fund rating agencies). Riskdata calculated performance and risk for each category for the year-to-date and for the crisis period from 15 July to 20 August. Of 333 treasury funds, a few suffered losses totaling €17 million during the summer crisis, although the vast majority of funds in this category remain robust and did not suffer any losses. Of 122 funds in the treasury dynamic category, 39% lost money in the crisis, with losses of €393m. The average loss in the crisis of the funds that lost money in this category was -1.15%. The year-to-date performance of these ‘losers’ was 1.05%, so over half of their yearly performance was lost in the crisis. The average year-to-date performance of this category as a whole was 1.7%. Of the 88 funds in the treasury dynamic plus category, 50% lost money in the crisis, with losses of €119m. But the average year-to-date return of these funds of 2.1% was superior to the treasury dynamic category, proving that labeling funds in such categories gives no indication of the actual risks being taken. Traditional tools to guide investors to select true risk-free treasury instruments such as volatility or even Value-at-Risk (VaR) gave underestimated predictions compared to actual risks. Moreover, they did not allow the differentiation of risky treasury funds from classical low risk ones. The average two-week volatility of dynamic money market category running up to the crisis was 0.2% for the ‘losing’ funds, and also 0.2% for those that did not lose. The two week VaR (at 99% predicted loss) was -0.49% – not much different from the much safer treasury category. Riskdata say that classic risk measures are necessary but insufficient, as they do not allow investors to see the ‘colours’ or types of risk in order to carry out informed investment decisions. Also, these measures are not insightful enough in extreme crisis situations. The company analysed the ratings of funds by a major rating agency and discovered a poor relationship between the fund rating and the real market risks being taken. In some categories of funds, funds with higher ratings were actually more likely to have experienced losses.


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