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Funds that an investor moves from one investment vehicle to another in response to higher interest rates. For example, an investor may move hot money from an investment-grade bond to a certificate of deposit at another institution where the certificate of deposit has a higher return. Likewise, one may move funds from one country to another when interest rates in the second country are higher. Hot money may be moved when a country or institution lowers its interest rates.
Funds that are controlled by investors who seek high short-term yields when the funds are likely to be reinvested somewhere else at any time. Some financial institutions attract hot money by offering above-average yields on certificates of deposit. However, if the rate is lowered, the funds are likely to be lost to another institution or investment.