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Cash Equitization in Global Equity and Multi-Asset Portfolios

In: Derivatives Applications in Asset Management

Author

Listed:
  • Eddie Cheng

    (Allspring Global Investments)

  • Wai Lee

    (Allspring Global Investments)

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.

Suggested Citation

  • Eddie Cheng & Wai Lee, 2025. "Cash Equitization in Global Equity and Multi-Asset Portfolios," Springer Books, in: Frank J. Fabozzi & Marielle de Jong (ed.), Derivatives Applications in Asset Management, chapter 0, pages 351-366, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-86354-7_22
    DOI: 10.1007/978-3-031-86354-7_22
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