What are money market funds?

Money market funds don’t typically make for good dinner party conversation but after the rate hikes of the past two years, these humble instruments have been gaining in popularity.

Money market funds (sometimes called liquidity funds) are low risk, cash-like investment vehicles that mostly invest in government-issued bonds. They offer investors a return that increases with interest rates. This is particularly attractive when banks pass on very limited interest in savers’ regular current accounts (and limit the size of savings accounts). It’s also essential for companies managing their cash balances.

Money market funds allow investors to redeem on a daily basis. But there’s a tiny catch: if you elect to get money back the same day (and let's face it, we're all used to instant cash), you'll have your 'return' distributed as cash each day. This means to achieve the equivalent annual percentage return, you need to keep reinvesting that cash in the fund, an administrative burden for most investors. If you want to rid yourself of that burden, you'll need to wait an extra day to receive the cash. This may be OK for some, but most investors, whether an individual or an institution, want fast access to cash when it matters.

Blockchain tokenization and ‘airdropping’

This is where blockchain tokenization comes in. With the fund ownership represented on a blockchain, investors benefit from same day payments and have any income automatically reinvested. In this case, the income is “airdropped” to investor accounts as new tokens. We expect that access to cash will get even more frequent, as providers develop liquidity facilities to create greater investor value.

In early 2023, UK FCA-regulated digital assets business Archax started to offer tokenized investments in abrdn’s money market funds via their trading venue, using the enterprise distributed ledger technology Hedera Hashgraph. Professional investors can connect directly to Archax’s platform, while individuals can access suitable product via their brokers, who in turn connect to the platform. Interest has been substantial, far surpassing our initial expectations for a product that was pushing new boundaries in terms of technology use and market scope. Our view that digital asset businesses with large cash balances would be our day one target market was correct, but we underestimated the interest from traditional, albeit more technology-led, corporates, such as payment companies. As we develop operational and technology improvements to offer even faster access, we expect this interest to grow.

Tokenization and the future of money market funds

Money markets are just the beginning for fund tokenization. As asset managers ramp up their blockchain tokenization projects, we can expect to see more products coming to market. For many, the goal is to use tokenization to bring private market investments to the masses. Some have made moves in this space already, although few, if any, have really tested the market demand, with limited use of public blockchain and connectivity to traditional distributed channels. Expect to see that change in 2024 as abrdn, and others, bring more tokenized products to market. With policy makers, regulators and industry bodies putting greater emphasis on the need for innovation and investment in financial services, we can also expect more asset managers to move towards enterprise technology such as Hashgraph, and onto regulated venues like Archax. With that we’ll see greater potential for adoption of tokenised funds and greater investor value.

As with any form of investing, the value of holdings in money market funds can go down as well as up. Investors may get back less than they invested.