Oct. 2 (Bloomberg) -- Elon University, Bethany College and Oberlin College rushed to find alternative sources of cash after Wachovia Corp. curbed access to a $9.3 billion investment fund used by more than 900 colleges to hold money needed for salaries, maintenance and other expenses.

Colleges can redeem only 34 percent of their investments in the short-term Commonfund because of the ``liquidity squeeze,'' said Laura Fay, a spokeswoman for Charlotte, North Carolina-based Wachovia, in an interview. Earlier this week Wachovia, the trustee for the fund, had capped availability at 10 percent.

Wachovia's move prompted college officials to tap other accounts and raised concern that schools may not have enough cash to pay bills. Lindsborg, Kansas-based Bethany, which had about $700,000 in the fund when access was restricted, planned to withdraw $400,000 in November, said President Edward Leonard. Bethany is now assessing alternatives, he said.

``It was really a sucker punch, you didn't know it was happening,'' Leonard said in a telephone interview today. The short-term fund isn't the only source of cash, he said, noting that the school has an endowment valued at $25 million as of June 30. ``The one thing I don't want the college to do is to panic,'' he said.

In New York, Standard & Poor's Ratings Services said it was analyzing the effects of Wachovia's move on the rated debt of schools.

Commonfund also limited withdrawals from a second fund, its $1 billion Intermediate Term Fund, to 30 percent to preempt a run by investors.

Oberlin's Checks

Oberlin College, which had about $7 million in the fund, was able to draw on ``plenty of other working capital,'' said Ron Watts, chief financial officer of the Ohio school. Still, Watts said he was concerned whether transfers and checks written from the fund's account would be honored.

``We just wired funds in on Friday'' and Oberlin was notified on Monday at 9 a.m. that the money was frozen, Watts said in a telephone interview. ``That's an unbelievable problem.'' Oberlin plans to open two bank accounts this week to further diversify its assets, he said.

``It's a scenario no one could anticipate,'' he said. ``Oberlin will not be hurt. It's more of a big distraction.''

Elon, in North Carolina, with $46 million in the short- term fund as of three days ago, also said Wachovia was forcing it to dip into other funds.

``We are going to use the liquidity we have elsewhere to supplement what redemptions we were able to get to pay the bills we need to pay for,'' said Gerald Whittington, vice president for business, finance and technology at Elon, in a telephone interview today.

`Unprecedented Environment'

The ``unprecedented environment'' in the market contributed to Wachovia's decision to curtail the fund and plan its closure by Dec. 31, Fay said. The vote Sept. 29 by the U.S. House of Representatives rejecting a $700 billion financial-rescue package influenced the decision, she said. Wachovia agreed Sept. 29 to sell its banking operations to Citigroup Inc.

Wachovia's move took the Commonfund by surprise, said John Griswold, executive director of the Commonfund Institute, the research arm of the Wilton, Connecticut-based investment adviser.

``Wachovia was the trustee of the fund and they resigned and closed it,'' Griswold said in a telephone interview. ``Everybody was upset to hear this news, especially at the end of a quarter, when they have to make payroll and cover expenses.''

Commonfund's Statement

Wachovia's actions weren't taken ``in response to any losses in the fund and were not a response to an increase in redemptions,'' Commonfund said in a statement on its Web site. Commonfund also said it's seeking a new trustee for the fund, and that to date no participants have incurred any losses on their invested principal.

Even if the fund isn't able to sell any assets for now ``liquidity will rise to 57 percent by year-end based solely on maturing securities in the fund,'' said Commonfund's president, Verne Sedlacek, in a memorandum posted on the Web site.

The short-term fund, created in 1974, is structured to provide at least the average yield on a three-month U.S. Treasury bill, Commonfund said in a statement. Colleges and universities use the fund like a money-market account, gaining quick access to their investments, said David Clay, treasurer of Grinnell College, in Iowa, yesterday in a telephone interview.

Grinnell's $4.8 Million

Grinnell had about $4.8 million in the fund before it closed, said Russell Osgood, president of the school. Grinnell's operations aren't affected by the closing because the college had already started withdrawing money and diversifying its cash deposits about six months earlier, he said.

Grinnell, with an endowment of $1.5 billion at June 30, had a small part of the school's total assets in the short- term fund.

Kenyon College, in Gambier, Ohio, has about $3 million in the short-term fund, said Joseph Nelson, vice president for finance.

``We expect to be fully whole on the transaction and we're just dealing with the situation as it develops,'' he said. ``We have no reason to believe there will be any material impact. Kenyon is very liquid.''

To contact the reporters on this story: Julie Ziegler in Boston at jziegler@bloomberg.net; Jamie McGee in New York at jmcgee8@bloomberg.net.

Last Updated: October 2, 2008 18:04 EDT