In an environment where evolving investor expectations and market volatility mean every basis point matters, our hedge fund and cash experts explain why alternative asset managers should treat cash as a strategic part of their portfolios.
Following an extended period of low and negative interest rates, cash has re-emerged as a critical component in alternative asset managers’ portfolio performance. Today, hedge fund and other alternative managers need to treat cash as a strategic asset – one that is just as important in their portfolio as any other asset.
Cash management matters more than ever
Investor demand is transforming how asset managers approach cash management. “Investors want to know they can easily and readily liquidate their fund positions, while fund managers must have a portion of their investments in cash to manage those redemption requests,” says Fiona Mulligan, Global Liquid Alternatives and Hedge Fund Product and Solutions Manager at BNP Paribas’ Securities Services business. “Getting good returns on that cash, especially as rates have reverted in recent years, has become imperative to improve the bottom line for investors and stay competitive.”
Sophisticated investors increasingly expect their managers to treat every aspect of the portfolio – including cash positions – as a potential source of alpha generation. No longer content with opaque cash management practices, investors want a transparent understanding of how much cash the manager is sitting on, its yield optimisation strategies and the return it is getting.
Recent banking sector volatility has added a further dimension to firms’ cash management considerations, says Charlotte Phillips, Global Head of Liquidity & Head of Cash Management & Liquidity Services UK. “The 2023 collapse of several banks, both regional and global, highlighted significant variations in financial stability across the sector. This has driven a flight to quality, with managers increasingly focused on counterparty risk and the safety of their banking partners.”
Navigating the challenges of modern cash management
Cash may be king but the operational complexities of effective cash management are multiplied whilst rates remain elevated (despite several rates cuts). Many fund managers are grappling with fragmented relationships and cash accounts spread across disparate banks, custodians, prime brokers and other service providers, causing risks and drag in their operational processes.
“The operational overheads of managing multiple relationships can be significant,” notes Mulligan. “Maintaining cash accounts across numerous providers creates complex reconciliation challenges. Communications can be fragmented. Investors expect their fund managers to act quickly, but managers may experience delayed visibility into cash positions, impeding quick decision-making and leading to missed opportunities. And the challenges are magnified when firms operate across different currencies and jurisdictions.”
The regulatory environment adds another layer of complexity. Regulated funds such as UCITS must maintain specific liquidity ratios. Monitoring and reporting on these across multiple banking relationships exacerbates the strain on operational resources and heightens the risk of compliance breaches.
Maximising yield on cash positions while maintaining optimal liquidity for regulatory compliance or investor redemption purposes requires sophisticated cash forecasting and management capabilities. As does navigating market volatility. “Current market uncertainty, from geopolitical tensions to trade policy changes, and the substantial margin calls and redemption requests they trigger, reinforces the imperative for managers to have clear oversight of their liquidity. Managers need to be able to forecast their cash requirements and optimise returns on available liquidity” says Phillips.
Avoiding the liquidity trap
When market conditions deteriorate and liquidity tightens during volatile periods, it becomes even more important for managers to have access to their cash.
Having visibility of liquidity requirements days in advance enables managers to understand both their current positions and projected cash flows to manage investor activity, margin requirements and operational needs – allowing proactive cash management and planning rather than reactive scrambling during crisis periods.
“Pre-established relationships with financial partners who can provide flexible credit facilities and other financing solutions can bridge temporary liquidity gaps to prevent forced asset sales,” says Mulligan. “Tight liquidity doesn’t mean you have to make distressed decisions.”
Strategic partnerships: the role of fund administrators
Managing liquidity and deploying cash optimally in-house takes significant investment in expert teams, as well as in treasury systems that give transparent views of balances across multiple accounts and advanced cash forecasting and management capabilities. The alternative is for managers to work with their fund administrator as a strategic cash management partner.
Fund administrators possess unique insights into portfolio positions, investor flows and liquidity requirements, given their daily oversight of a manager’s real time positions and the market movements affecting portfolio valuations every day. This intimate knowledge means they can provide strategic guidance on cash deployment and risk management. Modern cash management tools can eliminate manual processes, and provide the transparency investors and regulators demand. And the fewer the intermediaries a manager uses, the faster and better they can execute.
From prime brokerage to depositary: BNP Paribas’ offering
As a global financial institution, BNP Paribas offers alternative managers a full suite of integrated cross-border services, from fund administration, depositary and custody to prime brokerage and banking. Having a one-stop shop with one point of contact brings clarity, agility and scalability, enabling managers to act fast, be cost efficient and focus on generating alpha. “We have full visibility across a manager’s positions , value their funds, track their investors and analyse their historical liquidity patterns, then have products available to meet their cash management needs” says Mulligan.
“We pay competitive rates for cash on deposit ,” Phillips adds. “We offer competitive interest rates on cash held in call deposit accounts, ensuring clients are not compelled to allocate funds into other instruments to generate returns. This approach guarantees uninterrupted access to liquidity, with funds available on the same day and no adverse impact on the interest earned.”
Through the MyTreasury tool within BNP Paribas’ NeoLink front-end portal, clients can automate all their cash forecasting and management needs, she explains. “They have oversight across all their accounts, understand their total liquidity, and access it immediately. The tool allows them to forecast their upcoming cash needs and automate payments based on the forecast. As an AA-rated, systemically important global financial institution upholding strict liquidity coverage ratios, we are recognised as a dependable counterparty for client cash holdings, particularly during periods of elevated market stress.”
Manage the future
Cash management optimisation is now a competitive requirement, requiring dedicated attention and expertise. Successful alternative asset managers view cash management as an integral part of their investment strategy and are partnering with financial institutions that can provide not just competitive rates but comprehensive solutions, strategic insights, transparency and stability.