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Making the Most of Your Cash
As interest rates increase, having access to crucial data, the best tools and the right partner can make all the difference.
By Nadia Cobalovic, Co-Chief Operating Officer, Northern Trust Hedge Fund Services, Kevin Dunleavy, Head of Cash Management, Northern Trust Hedge Fund Services, and John Kushner, Head of Relationship Management, Northern Trust Hedge Fund Services
With rising inflation and central banks raising interest rates to combat the issue, the outlook for the global economy is uncertain. Inflation, exacerbated by the conflict in Ukraine, poses a "clear and present danger” to the international economy, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said in a speech on April 14, 2022.i The IMF expects the global economy to expand by 3.6% in 2022, a sharp decline from the 6.1% expansion it experienced in 2021, due to the situation in Ukraine, rising prices and global trade issues.ii
The U.S. is experiencing the fastest growing inflation rate since December 1981, with consumer prices increasing 8.5% and energy prices rising 32% in March 2022 compared to March 2021, according to the U.S. Department of Labor.iii iv In order to slow inflation, the U.S. Federal Reserve is looking to increase interest rates quickly. The U.S. central bank has raised interest rates twice so far in 2022, with a 0.25% increase in March and a more aggressive 0.5% hike in May and several more increases are expected in 2022 and 2023.v
During these economic conditions, cash optimization is vital. Having access to data, technology, automation and an experienced administrative partner is vital to efficiently manage liquidity and can be a significant competitive differentiator.
Access to data and real-time transparency is indispensable during volatile market conditions. With interest rates rising, uninvested balances become more impactful to your bottom line, making it increasingly important to assess your short-term investment guidelines. Key items to consider include liquidity allocation across money market funds, banking providers and short-term securities. It is critical to ask: are you diversified?; do you have real-time visibility into each liquidity bucket?; can you readily access funding intraday for investment purposes?; do you have a lens into daily margin changes across your financed positions?; and other potential “triggers” that can impact working capital.
Having the right software platform is always crucial for hedge funds but it especially makes a difference during tense market times. Using a powerful and flexible platform reduces operational drag and inefficiencies; also making it easier to integrate middle- and back-office functions while adding transparency into operations, transaction lifecycles and NAV production. By combining functions into a single platform for all covered assets, strategies and lifecycle events, users can see a single data set across functions to simplify data sharing and to easily access P&L, real-time data, analytics and monthly fund valuations.
Payment platform: A centralized and secure payment application with systematic controls and integrated workflows that look to prevent fraud, increase transparency and provide direct connectivity to all your banking providers, custodians and prime brokers.
Margin applications: A scalable service that readily supports an increase in margin calls, reconciliations and dispute resolution. Having the ability to independently calculate and challenge margin discrepancies is increasingly important during volatile market conditions when prices and margin vary significantly day over day.
Cash optimization tool: An automated service for viewing and efficiently managing cash across all currencies and counterparties to meet funding needs, minimize financing costs, maintain reserves and invest excess cash. Cash optimization allows managers to employ a rules-based approach to manage cash across portfolios.
When tackling the challenges of running a hedge fund during uncertain economic times, selecting the right administrative service provider is key. Here’s what a fund should be looking for:
- Diversified capabilities to leverage as an extension of your business.
- Automated connectivity that integrates workflows with real-time transparency – trade capture, risk, profit and loss, lifecycle events, settlements and reconciliation services.
- Exceptional client service – highly adaptable and versatile culture that focuses on creating operating leverage.
- Additional services – operating partners that can readily leverage other areas of their organization: asset management, money market funds, custodial services, trading and currency hedging.
Don’t forget to look for consultation and experience to help you navigate daily challenges and opportunities and provide a view into current and emerging best practice.
As interest rates rise, the global economy is quickly shifting. Asset managers are increasing their cash holdingsvi, money-market funds’ holdings are growingvii, inflation is weighing on the entire economy and the stock market continues to be volatileviii ix.
With these factors, knowing your Treasury operations teams can manage cash, collateral, liquidity and margin is very important. Optimized cash and collateral practices can improve overall investment performance. There are opportunities to be found during times of global economic uncertainty and finding the right partner can help hedge fund managers uncover these possibilities.
i Global growth hit by Ukraine war, IMF's Georgieva says, warning of 'very dangerous time' | Nasdaq
ii IMF Sees Global Economic Slowdown Amid Ukraine War - WSJ
iii IMF chief warns inflation poses a 'clear and present danger' to global economy (msn.com)
v Fed raises rates by half a percentage point — the biggest hike in two decades — to fight inflation (cnbc.com)
vi Wall Street Finds New Value in Cash as Global Fears Weigh on Markets - WSJ
vii Wall Street Finds New Value in Cash as Global Fears Weigh on Markets - WSJ
viii Stock Market Falls Ahead of Alphabet, Microsoft Earnings - WSJ
ix Dow Falls as Inflation Worries Weigh on Markets - WSJ