Regulations designed to safeguard the $2.7 trillion U.S.money-market industry threaten to steer cash towardhigher-risk alternatives.

Investors may respond to the market overhaul that took effectlast week by seeking the higher yields of short-term bond funds,say Crane Data, Fitch Ratings and Goldman Sachs Asset Management.In a sign of the segment's appeal, a category that Crane dubsconservative ultra-short bond funds, with maturities mostly lessthan one year, has swelled to a 19-month high of almost $31billion.

But these funds aren't subject to the same standardization astheir money-market counterparts, raising the prospect thatinvestors will be surprised by the degree of potential losses andeven run for the exits if values slide. That may undermine some ofthe benefits from the money-fund revamp, which most firmsagree has gone a long way to reducing systemic risks in an industrythat helped fuel the financial crisis.