Cash Securitization: The Challenge of Effective Liquidity Management
Most institutional investors begin the portfolio-building process by establishing long-term return and risk objectives. To achieve these objectives, they create investment policies to determine asset-allocation targets. Cash, as an asset class, generally receives a small or zero allocation. However, cash may be required for a variety of reasons, including payments of pension benefits, endowment distributions, capital call commitments, and other expenses accrued during operations.
Although fund sponsors have been implementing cash securitization (also known as cash equitization or cash overlay) for many years, the topic remains esoteric for some. In plain language this paper will clarify what cash securitization is and how it can be used within a broader liquidity-management program. We’ll also review the challenge of liquidity management, introduce the tools that make cash securitization possible, and provide an example of the mechanics involved for effective implementation.
