Pillai says that investors usually need liquidity at month’s end, year’s end and on bank balancing dates. “You target the maturity periods for when liquidity pressure will be its highest.” The liquidity premium now earns cash managers up to 30 basis points, far above its old yield of between five and 10 bps, he says. Most banks have now switched from issuing medium term debt from up to three years in advance to one year. “It’s gone crazy in the last six months because banks have moved their medium-term funding into one year. They consider the two or three year margin to be excessive. They’re bringing their issuance short. They’re taking the pain for one year and hoping that it gets better.”

Institutional investors use their allocations to cash either as a source of liquidity for when investment opportunities arise, or as an alternative to fixed income when that asset class performs poorly, Ken Marshman, managing director of investment consultancy JANA, says.

While some institutions have opted for cold cash managers, he says that some cash enhanced offerings are attractive. JANA likes some of the enhanced cash products that hold A and AA-rated corporate debt, such as syndicated loans and traded high-yield securities. Perpetual’s Korber says the manager now favours more liquid, short-dated securities. This paper is also less volatile due to its shorter maturity date, which reduces investor’s exposure to any prolonged periods of volatility that might occur within the life of the investment. This approach makes the fund more “transactional”, he says.

A peculiar risk involved in running a CMT is managing the client base, in addition to their money. BNY Mellon’s Little says careful selection of clients is equally as important as managing the bank bills. “You want a well-diversified group of investors and you’ve got to be careful which mandates you take,” he says. “We’ve had calls before, like ‘We want to give you $12 billion to manage for four days’. It sounds great, you make four days worth of fees from it, but usually we don’t want it. You’ve got to go really short [duration] on it and it wrecks the yield for the other clients. “It’s the same if you’ve got a cash fund with a couple of investors dominating the book: you have to be short because every investor has to be able to get their money out the next day.”

So a balanced mix of clients, who need liquidity at different times, is what CMT managers should aim to keep, according to Little. “So you’d mix corporates, for example, who tend to need cash at the end of the quarter to pay dividends, with credit card issuers who go through a 38 day cycle of collecting payments and then drawing down to pay their bondholders.”