The cash that companies carry on their balance sheets is typically divided into three categories: working capital, liquidity, and strategic cash. Working capital is the cash needed to fund day-to-day operations. Liquidity is cash that an organization keeps on hand to meet an unexpected shortfall in working capital. Businesses traditionally have held their working capital funds in bank accounts and held the cash designated for liquidity in prime money market funds, which deliver low yields but offer withdrawal at any time.

Strategic cash is the cash left over after the first two buckets are filled. Strategic cash is typically held as a buffer against unanticipated needs like a major acquisition or facility build-out, as well as to strengthen the balance sheet. Liquidity is definitely a concern for strategic cash holdings, but companies tend to seek out somewhat higher returns than they get on their working capital and liquidity. So cash in the “strategic” bucket is usually invested in bonds—typically corporate or agency securities with maturities inside five years.

Before the 2008 crisis in the financial markets, many companies worked to minimize the amount of cash in their working capital and liquidity accounts, in favor of higher-yielding strategic cash accounts. Then, in the immediate aftermath of the financial crisis, preferences experienced a dramatic reversal. The bankruptcy of Lehman Brothers and the subsequent failure of the Reserve Primary money market fund caused corporate investors to flee strategic cash, which was suddenly perceived as unacceptably risky, for the safety of bank deposits. According to the Federal Reserve, institutional money fund balances declined by 30 percent between August 2008 and the end of 2012.