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Alternatives funds risk “missing out” on performance from cash drag, says Citco’s Middle Office Solutions team

December 2023

19 December 2023 - Alternatives funds could be missing out on a performance boost from cash positions if they are not making the most of multi-year high interest rates. Cash management has become an increasingly important focus for managers - whether they run fledgling funds or multi-billion dollar strategies - since the start of last year as central banks like the US Federal Reserve raised rates to combat surging inflation.

The US Federal Open Market Committee (which sets interest rates), voted for 11 rate hikes between March 2022 and July 2023 as it sought to quell Consumer Price Index (CPI) inflation. It has taken the Federal Funds rate from near zero to today’s level of 5.25%-5.5%, a 22-year high. Whether more rises are on the way is unclear, but the Fed’s policy shift has altered the risk/reward profile of all asset classes, and made cash in particular far more attractive.

This has implications for all alternative investment managers, with a number of operational considerations to take into account in order to make the most of cash as a return-generating asset.

Challenges to global cash management

When interest rates around the globe were at or near record lows, managing multiple currencies may have been low on a manager’s list of priorities as differences in spreads were small.

However, now a number of key interest rates are significantly higher, cash can have a material impact on a strategy’s performance.

This is especially true for some asset classes, such as infrastructure, where cash may be sitting in accounts for some time. Simply put, managers cannot afford to accept lower rates on cash than competitor funds given the drag it can have on performance.

Managing this cash in-house can be far from straightforward. Firstly, for large hedge, private equity and real assets managers, cash may well be in different tranches spread out in the US, Europe, Asia and the Middle East. It can be complicated and time-consuming for in-house teams to have full visibility over these different tranches, creating operational headaches.

Cash may also be sitting in multiple bank accounts, in different currencies, earning different rates of interest, and invested in accounts for different lengths of time. Again, staying on top of this is a growing challenge for in-house teams in an era of higher rates, especially as end investors are demanding greater transparency and more information about all aspects of funds they own.

Solving the cash conundrum

Oversight of cash positions can be much easier if managers have a platform where they can see all their cash in one place, allowing them to make timely decisions to move excess cash.

The Citco group of companies (Citco) offer the cash management solution via Æxeo® Treasury, Citco’s proprietary, highly customizable, end-to-end treasury application. This assists clients in obtaining start of day cash balances from all of their bank accounts, covering all currencies and jurisdictions, providing treasurers with the ability to put this idle cash to work in higher interest earning accounts, or to deploy it to another strategy.

Rather than do this manually as some managers do when they handle this in-house, the cash management solution uses a systemic, cloud-based application that gathers the data and provides a clear view as to the state of affairs with all of a manager’s cash positions.

To learn more about Citco Middle Office Solutions and whether it can help your business with cash management, or any other operational issues, please get in touch.

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