Analogy warning. Your car is your hedge fund. Its engine is made up by your traders, ideas, and portfolio managers (PM). And your cash is the fuel you put in the tank. It has low emissions but burns fast. And we all know that if you're not fueling your engine with the right kind of gas, you're wasting money. You're not operating as efficiently as you can. Let the tank empty and you blow the engine. If you have more than you need, it spills all over the road.

The slippery market, geopolitical, and macroeconomic conditions of summer 2025 demand that funds be vigilant in ensuring sufficient cash flow and diverse liquid assets are readily available to deploy as collateral, particularly during spikes of margin requirements. For hedge funds, cash has traditionally been regarded as a buffer against margin calls or collateral increases. Here are some strategies for optimizing cash management so firms can activate idle cash to generate Alpha. With a lingering possibility for market volatility, fluctuating rates, and higher opportunity costs, hedge funds must treat cash as an asset class — not just a balance.

Hidden costs of idle cash

The impact of suboptimal cash management can be mystifying. Managers are so focused on driving returns in their preferred asset classes that cash becomes a blind spot. If a fund is not deploying cash effectively and efficiently, they’re missing out on the ability to generate the maximum PnL for shareholders or clients. If there’s anything our swiftly advancing data technology and AI agents can do, it is deriving granular insights that were once beyond the human field of vision. We can see what is hidden, including the hidden costs of idle cash.

Money Market Fund timing

We have long proposed that treasury functions should be thought of a profit center for buy-side firms, especially in our increasingly automated financial system. Firms do not like costs; they should hate opportunity costs. One such under-the-radar cost of idle cash is missed liquidity windows, such as missing money market fund (MMF) yields by inadequate timing of cash movements around cutoff times. If you're past the cut-off, you miss out on same-day yield and have idle capital overnight. It's particularly important around holidays when there are earlier MMF cutoffs. It's important to plan around those earlier cutoffs to ensure that cash is allocated, hitting those MMFs and invested before cutoff.

Buffering... for margin call preparedness

For a hedge fund, utilizing leverage means it needs to borrow cash, which it has to pay for with financing. If it is underleveraged, then there is a purse of potentially underutilized cash that shouldn't sit idle, but rather needs to be deployed for maximum utility. Of course, purposeful cash buffers are important insulation against sudden macro shifts, margin calls, or redemption pressures.

Cash buffers are important because they help streamline and let you focus on the money movements that really need to occur when it comes to operational efficiency. However, an overly portly buffer can become a performance drag, relegating perfectly actionable capital to earnings underachievement. If cash is not invested, it might only earn overnight rates, which can significantly drag down overall portfolio performance, especially when better investment opportunities (e.g., yielding 7-8% a year) are available. Read into this what you will, but this could spell fragility in the face of market shocks: Unencumbered cash ratios have been dropping steadily over the past decade, with the top 10 largest funds reaching a 10-year low point at the end of Q1 this year.

The high cost of debit optimization

Does your sheet have positive balances at one counterparty and negative at another? If so, you're not getting the cash flow efficiency of reducing your debits as much as possible. Automated treasury processes help firms spend less cash to settle more trades, while not absorbing excess margin or overdraft fees. Superior treasury cash management in offsetting debit balances with credit balances reduces excess intraday funding requirements.

One factor in debit optimization includes those delayed MMF cut-off times, keeping settlements flowing while others scramble. Further, treasury’s capability to compare margin requirements with prime brokers can be a key differentiator. According to Goldman Sachs’s, hedge fund gross leverage, or total borrowing, reached 270% in April, a five-year peak. Higher leverage can factor into fund failures if the market moves in an unfavorable direction. See our previous article to go deeper on Margin Replication and Simulation: Mastering Treasury Risk Management.

Cash management to contain interest rate risk

Though volatility had stabilized somewhat by the start of H2 2025, uncertainty has not evaporated since US trade policy remains a moving target with some tariffs scheduled to go live in the next few weeks. The impact of H1’s trade policy shocks is still seeping into the economy. Further, if the US replaces Fed chief Jerome Powell, rates forecasts may change. A spike in inflation, another major equities or bond sell-off, or other shocks can lead to rapid rates increases. Higher rates can leave a hedge fund’s counterparties dealing with fluctuating derivatives positions, and as a result may seek higher margin requirements. With liquidity preparedness for margin and collateral calls on everybody’s minds in 2025, hedge funds and institutional asset managers' necessity for a dynamic response to cash management has never been greater. Northern Trust’s global survey found that 60% of asset owners said that liquidity has become more important and cash allocations were averaging 11% of portfolios globally. Resilient collateral management and nimble cash management during volatile times can be the difference between a firm’s long-term success or stagnancy.

Cash as a performance lever

Fund administrators and hedge fund treasurers are increasingly expected to act as jockeys of the firm's balance sheet, in support of working capital optimization and generating ROI from cash surpluses. Those that recognize cash management as a performance lever will gain an edge over those who still consider it a perfunctory task.

There are several areas ripe for improvement in most cash utilization workflows. For example, missing the aforementioned MMF subscription cut-off could mean sacrificing a risk-free return overnight. Multiply that across billions of dollars in AUM, and we’re talking about material Alpha erosion. Incorporating margin analysis into the investment workflows using margin calculators helps PMs evaluate the impact of different strategies in real time, leading to more efficient capital allocation.

Among their numerous emerging use cases, AI agents are becoming key tools for improving cash flow forecasting and cash positioning capabilities, offering significant improvements in predictive analytics and driving measurable efficiency gains. For more on AI adoption, read our recently published whitepaper Age of AI: The Latest on Artificial Intelligence in Hedge Fund Operations.

Strategies for optimizing cash management

Automating sweeps into MMFs

Back to the topic of missed yield opportunities from cash drag: Automated sweeps should be de rigueur for fund managers as ways to deploy dry powder for non-levered funds and borrowed cash from prime brokers. Savvy treasury leaders allocate unencumbered cash reserves to market-neutral funding opportunities for higher-yielding investment options or debt reduction such as MMFs.

Modern cash sweep tools, automated across all accounts and currencies, are a monumental time saver, replacing the manual reconciliation and determination of how much cash to invest. Further, having excess cash buffers in place will save time and ensure that unencumbered capital doesn’t become an afterthought. The success of these automations is reliant on a high level of control and precision via accurate and timely data — real-time visibility into liquidity positions across custodians and into all accounts and currencies. If managers can instantly see available and committed cash, they can make every dollar work for the firm.

Reducing operational friction

The elimination of resource-sapping manual steps in cash management processes can save valuable time that can be devoted to higher-value functions. In a rigorously competitive hedge funds ecosystem in which a war for talent is being waged and fee compression and ballooning costs are exerting pressures, streamlining operations for greater efficiency is mission critical. The goal is to turn treasury from a cost center into a profit center by maximizing capital efficiency and minimizing risk through liquidity cash management, margin, financing replication, and counterparty relationship management.

The importance of cash optimization strategies

Treasury cash management in today's modern interest rate environment needs to be considered as a key mechanism of your Alpha generation toolkit. Hedge funds have rebounded nicely from Q1’s volatility. HFRX Global Hedge Fund Index indicated a gain of +1.10%. However, the big name players were eclipsed by smaller funds in the first half of 2025. It's no longer just about ensuring that you have the collateral or cash on hand to fund trading. It's about making sure that that cash is used not just as an asset and not merely as a balance, but as an asset class.

Key Takeaways:

Q1: Why is idle cash a hidden cost for hedge funds?

A1: Idle cash earns minimal yield, dragging performance and missing Alpha opportunities, especially when better alternatives exist.

Q2: What risks come from poor timing of cash movements?

A2: Missing MMF cutoffs can result in overnight idle cash, leading to opportunity costs and lower returns.

Q3: How can funds right-size their cash buffers?

A3: By balancing operational needs with deployment potential, avoiding excess that underperforms or shortages that trigger costly borrowing.

Q4: What role does automation play in cash optimization?

A4: Automated sweeps and real-time liquidity visibility reduce friction, improve capital allocation, and ensure cash works efficiently.

Q5: How can treasury functions generate Alpha?

A5: By using AI for forecasting, optimizing net debits, and treating cash as a performance tool, not a passive reserve.

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Eric Zinger