Ailing cash fund gets bailed out by Federated

Federated Investors, the third-largest manager of money-market accounts in the U.S., bailed out its Enhanced Reserve cash fund as declines in mortgage-backed securities caused the credit markets to seize up.

Federated allowed clients to withdraw their money without losses, said Lindsy Kollar, a spokeswoman for the Pittsburgh-based company. She wouldn't disclose the size of the fund, a private partnership open only to accredited investors, or the amount or cause of the losses.

Enhanced cash funds, which hold about $850 billion in assets in the U.S., are sold to wealthy investors and institutions as an alternative to money-market funds, offering higher yields by buying riskier assets such as mortgage-backed securities.

Rising defaults on home loans to borrowers with poor credit have caused losses among short-term bond funds and enhanced cash products that invested in lower-rated securities.

"I wouldn't say enhanced cash funds don't make sense, but it is more challenging to generate the extra return over money-market funds in today's environment," said John Krieg, director for product management at Chicago-based money manager Northern Trust.

The worst-performing ultra-short fund is State Street Corp.'s $65 million SSgA Yield Plus Fund, which has tumbled 8.6 percent this year, through Nov. 14.

The fund has 25 percent of assets in mortgage-backed securities, 70 percent in asset-backed securities and about 3 percent in collateralized mortgage-backed securities.

Boston-based Fidelity Investments' $732 million Fidelity Advisor Ultra-Short Bond Fund has fallen 4.6 percent this year, through Nov. 14, making it the second-worst performer.

The fund has 22.5 percent in collateralized mortgage obligations and 37.4 percent in asset-backed securities. The fund holds 18 percent in cash.

As investors have shunned risky debt, losses have spread to money funds. Bank of America, based in Charlotte, N.C., said it may provide as much as $600 million to money funds and institutional cash funds that have been hurt by bad debt.