JonathanBurton

NEW YORK (MarketWatch) — One of the original and largest money market funds has put a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1, in a rare instance in the fund industry of what is called breaking the buck.

Primary Fund RFIXX managed by New York-based money market fund inventor The Reserve, said late Tuesday that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero.

As of 4 p.m. Eastern, the value of the fund’s share was 97 cents. The Reserve said that redemption requests received before 3 p.m. will be paid out at $1 a share. The company said Primary Fund will continue to accept new money.

While Primary Fund’s Lehman holding was small compared to the fund’s overall size, the fact that it froze redemptions reflects a surge in redemption requests by investors.

The size and speed of the withdrawals was stunning. At 3 p.m. on Tuesday, Primary Fund’s assets stood at $23 billion, a $40 billion hit from the $62.6 billion in the fund on Friday, a spokeswoman for The Reserve told MarketWatch late Tuesday.

Effective today and until further notice, the proceeds of redemptions from The Primary Fund will not be transmitted to the redeeming investor for a period of up to seven calendar days after the redemption, The Reserve said in a prepared statement.

Retail account holders affected

Reserve Primary has both institutional and retail accounts. This appears to be the first case where a retail investor will lose money in a money market fund. said Peter Crane, president of market research firm Crane Data in Westborough, Mass. though he called the situation an anomaly.

Money market funds pride themselves on their liquidity and the safety of their investments. All money market shares are priced at $1 — a figure so important to the industry that fund companies take losses to keep the share price from dipping below $1, which is known as breaking the buck.

They didn’t just break the buck, they shattered it, said Don Phillips, managing director at investment research firm Morningstar Inc. MORN, -1.76% about The Reserve fund.

This is only the second time that a money market fund’s net asset value has dipped below $1. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate.

Phillips said the fact that The Reserve had to break the buck reflects the seriousness of its troubles. People say that if you break the buck on a money market fund you’re saying that you don’t want to be in the money market business anymore.

Phillips speculated that because The Reserve is solely a money market shop, it didn’t have the resources to bail out Primary Fund in the way a diversified mutual-fund giant such as Fidelity Investments, Vanguard Group or Evergreen Investments, which is owned by Wachovia Corp. WB, -4.64% would be able.

Fidelity, other money fund giants reassure investors

Some of the largest money-market fund providers sought to calm investors in the wake of The Reserve’s announcement.

Fidelity Investments said that its money market funds are sound. We can state unequivocally that Fidelity’s money market funds and accounts continue to provide security and safety for our customers’ cash investments, said Anne Crowley, spokeswoman, in an email response.