As the financial market turbulence plumbs new depths, hedge funds are increasing the proportion of cash in their investment portfolios. According to new research from Citigroup, hedge fund cash holdings are now at or close to their highest-ever average level.

The 30 per cent of their assets that Citi estimates that hedge funds currently have in cash amounts to a total of around USD600bn. Before the credit crisis erupted last summer, hedge funds were holding around 20 per cent of their assets in cash.

An important reason for this is that funds are bracing themselves for a potential spate of withdrawals at the end of the year, when the next redemption window opens for many investors have. It's better for managers to gently boost their cash positions now rather than have to liquidate assets in a hurry, or worse, tell investors that they can't have all their money.

Holding assets in cash can also seem a safety option at a time when the value of other assets is plunging, but it may not be quite as safe as it seems - even holding cash can pose liquidity risks, it was discovered this week, when the oldest US money-market fund temporarily halted withdrawals.

The USD64.8bn billion Reserve Primary Fund run by New York-based Reserve Management Corporation this week was obliged to delay withdrawals by seven days after being forced to write down USD785m in Lehman Brothers securities it owned. Citi estimates that around 17 per cent of the cash held by hedge funds - more than USD100bn - is in money market funds.

When instruments that are regarded as being equivalent to cash, the most liquid of all assets, start to pose liquidity risks, it leads one to think that predictions that the credit crunch is coming to an end may be somewhat premature.