>The Butterfield Money Market Fund (BMMF) consistently performed better than its peers during the mid-2000s under its award-winning managers at Butterfield Asset Management (BAM). At its peak its assets under management ballooned to $8 billion.

But over the past two years, it hit problems. The bank has ploughed tens of millions of dollars into the fund in the form of credit agreements to ensure that investors did not lose money.

The fallout appears in the company's 2009 audited financial results. The books show that in September last year, Butterfield Bank paid the fund $131.9 million for a type of fund called a Structured Investment Vehicle (SIV), reflecting its nominal value. But its estimated market value was just $52.8 million, the value at which the SIV was booked in its new home, the bank's available for sale portfolio.

The difference of $79.1 million [EmDash] accounted for in a mix of a $41 million credit support agreement and a $38 million unrealised loss [EmDash] was effectively part of the price paid by the bank to ensure its BMMF investors did not lose money. SIVs were a type of fund whose strategy was to borrow money by issuing highly rated short-term securities bearing low interest and then to invest that money in longer-term securities that earned a higher rate of interest, making a profit from the spread.

>SIVs were popular until the financial crash of September 2008. The longer-term, mostly asset-backed securities they invested in plummeted during the credit crisis.

Some investors might question whether a money-market fund should have been investing in an SIV. But the fund was also investing in other complex financial instruments. Evidence from Butterfield's 2008 annual report also shows that BMMF was investing in collateralised mortgage obligations (CMOs) and asset-backed securities (ABS). In February 2008, the bank paid $73.6 million for a batch of ABS from BMMF and five months later, the bank bought $81.7 million of CMOs from the fund.

Shares of a money-market fund are intended to stay at $1 and to offer investors a return from interest. If the underlying investments slide and the shares fall below $1 it is known as "breaking the buck" [EmDash] a rare occurrence for a money-market fund. Butterfield guaranteed investors' principal in the BMMF.

One source who previously closely involved with the fund felt the bank went too far in bailing it out.

"Shareholders of the bank should not have supported the fund to the extent they did," the source said. "The fund was a separate entity with its own shareholders and an independent board.

"However, if the fund had broken the buck, the damage to the reputation of the bank would have been significant, as the fund was something of a flagship for the bank."

Much of the money that flowed in and out of the BMMF came from insurance companies, who used the fund as a temporary home for their liquid reserves, allowing them to invest with low risk and to get a slightly higher return than with a basic deposit account.

So why did the BMMF's managers expose the fund to the added risk of longer-maturity investments, instead of sticking to the low-risk, shorter maturity investments typically used by a money-market fund? Because the returns were higher.

"They went long to attract the funds," the source said. "They should have stayed short."

Another source close to the bank said the driving force behind the decisions for the BMMF to invest in the CMOs, ABS and SIVs was Alistair Border, who was vice-president and head of fixed income at BAM.

Mr. Border reported to Ian Coulman, who was BAM's managing director. Both executives have left the bank within the past year. Seven years ago, after two BAM funds had won prestigious awards for five-year performance, Mr. Coulman expressed his liking for some of the investments that would go on to get themselves a bad name during the financial crisis.

>The Royal Gazette<$> reported at the time: "Mr. Coulman said BAM has found one particular sector of the fixed-income market less volatile than the corporate debt market: asset-backed and mortgage-backed securities have not suffered credit downgrades to the same degree as the corporate debt market." The sub-prime mort[JUMP]gage crisis that emerged in 2007 started to erode the value of some of those holdings, but it was the collapse of venerable US investment bank Lehman Brothers, in September 2008, which sent the financial markets into free fall and sparked a global liquidity crisis. Speaking in a session at the Bermuda Captive Conference last year ago, Mr. Border said BAM had been ready for the credit crunch, and had carried out credit analysis of its portfolios.

"We were prepared [EmDash] we battened down the hatches before Lehman came," Mr. Border said. He said BAM's reaction during this period had been to raise liquidity and talk with its clients about what was happening.

"A lot of people were running scared, but we were fortunate that we had a very stable client base," he told delegates. "There were opportunities and we were fortunate enough to take advantage of those opportunities." Those investors in BAM's Liquid Reserve Fund Ltd., which was frozen just days before Mr. Border made those remarks, might have felt less happy about the way their assets were managed. The fund's directors took the decision to suspend subscriptions and redemptions to protect investors' money from further losses in June 2009 and remains suspended.

The fund's objective was to seek higher returns than a money-market fund. According to a Standard and Poor's ratings report from February 2009, the fund invests mainly in corporate floating and fixed-rate securities, as well as three asset classes badly hit by the crisis [EmDash] asset-backed securities (ABS), mortgage-backed securities (MBS) and a collateralised debt obligation (CDO).

The mutual fund, which was formed in April 1995 and held in US dollars, had total assets of $38.25 million as of June 10, 2009, according to Bloomberg data. This marked a decline of more than half a billion dollars from its net asset value of $562 million at the end of October 2006.