Cash Equitization in Global Equity and Multi-Asset Portfolios

Eddie Cheng () and Wai Lee
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Eddie Cheng: Allspring Global Investments
Wai Lee: Allspring Global Investments

Chapter Chapter 22 in Derivatives Applications in Asset Management, 2025, pp 351-366 from Springer

Abstract: Abstract How portfolio managers use derivatives to address the challenges posed by cash drags in investment portfolios is demonstrated in this chapter. Cash drags occur when uninvested cash within a portfolio generates lower returns than the portfolio’s benchmark, particularly during low or negative interest rates. This performance gap can erode a portfolio’s competitiveness. Cash equitization offers a solution by using derivatives to align cash positions with the intended market exposure, maintaining investment objectives, and mitigating the negative impact of holding cash. The case focuses on a global equity-enhanced income fund benchmarked against the MSCI All-Country World Index (ACWI). The fund uses cash equitization to manage daily cash inflows and outflows. By employing liquid derivatives, such as S&P E-mini futures contracts, the portfolio management team replicates the fund's exposure to global equity markets while awaiting cash deployment into long-term investments. This approach minimizes opportunity costs, enhances operational efficiency, and reduces trading complexities. For example, the fund uses nearby futures contracts due to their high liquidity and low transaction costs, ensuring cost-effective execution and well-managed market exposure.

Keywords: Callable bonds; Capital protection; Hybrid securities; Structured notes; Yield enhancement (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_22

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DOI: 10.1007/978-3-031-86354-7_22

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