The slang term "hot money" is used in several different ways. In the financial world, hot money is money which is moved quickly between investments to take advantage of fluctuating interest rates, with the goal of obtaining the best interest rate possible for the funds. The term is also used in a criminal sense to describe hard currency which can be linked with a robbery due to special identifying characteristics.
In the world of finance, some investors opt to look for the best short term profits rather than taking long term positions. They move funds quickly from place to place as interest rates change. For example, someone might deposit funds in a bank offering 5 percent on a six month certificate of deposit, and pull the funds out once the term is over to move to another bank offering a competitive rate. Hot money moves rapidly in and out of different types of investment opportunities, making money for the investor who controls it.
In addition to moving money domestically to take advantage of favorable rates of interest, investors can also move hot money internationally. Every day, substantial amounts of currency flow in and out of many nations; when a country has high interest rates, money comes in, and the hot money strengthens the economy because it holds more currency reserves. Meanwhile, countries with lower rates which are losing money because people invest elsewhere experience a decline in the value of their currency. Some nations attempt to limit the effect of shifting investments on currency values by requiring internationally transferred funds to remain for a set period of time, such as one year.
Criminally, hot money is money which is designed to be traceable. This can include money which has been specially marked, money packaged with a dye pack which will burst when the package is opened, and money with known serial numbers. Bank tellers may keep funds known as "bait money" in their drawers for the specific purpose of having currency which can be traced in the event that a robbery occurs.
Criminals want to avoid hot money because if they are caught with a large amount of marked or traceable currency, they can be linked with a crime. Some criminals demanding payments will make specifications about how the money is to be packaged in order to make it difficult to trace. Criminals who do take hot money may use a variety of techniques to evade detection, but savvy law enforcement can sometimes trail them by following "hot" bills as they come into banks.
