Generate Alpha With Active Treasury Management

In today’s rapidly evolving financial landscape, buy-side firms face numerous challenges in optimizing treasury functions and generating returns. Traditional treasury management practices are no longer enough to meet the complex demands of the modern financial ecosystem. This is why buy-side firms are increasingly turning to active treasury management to proactively streamline liquidity management and maximize returns.

What is Active Treasury Management?

Active treasury management is a strategic approach to the treasury function that actively manages a firm’s cash and liquidity to generate alpha and improve financial performance. This strategy differs from traditional treasury management in that it takes a more proactive approach to cash and liquidity management, leveraging a range of tools and strategies to optimize cash positions and generate returns.

Active treasury management involves a range of strategies and techniques, including portfolio optimization, active currency management, yield enhancement, credit risk management, collateral and margin management, liquidity management, and cash flow forecasting. It also includes monitoring market conditions and adjusting strategies and tactics to take advantage of new opportunities and mitigate counterparty risks.

The Challenges and Opportunities of Active Treasury Management

The traditional role of treasury management has been to ensure the company has enough cash to meet its obligations while investing surplus cash to generate returns. However, the past few years have seen a significant shift in the role of treasury management with a greater focus on counterparty risk management, capital optimization, and compliance.

The challenges of active treasury management are numerous. Asset managers must manage multiple counterparties, monitor collateral and margin requirements, and keep track of cash balances across multiple accounts. The rise of decentralized workforces has added to these challenges. Asset managers must ensure that they have robust processes and systems in place to manage these complex treasury functions.

However, these challenges create opportunities for asset managers who can successfully achieve active treasury management. Realizing supplemental alpha, operational efficiencies, and reduced counterparty risk is achievable for any asset manager willing to make the time and resource investment to optimize the treasury function.

How Can Active Treasury Management Generate Alpha?

Active treasury management can generate alpha primarily in two ways:

Optimizing Cash Positions

By proactively managing cash balances, the treasury function can maximize returns on cash holdings and reduce the cost of capital. This can be achieved by leveraging a range of strategies, including yield enhancement techniques, active currency management, and portfolio optimization.

Yield enhancement techniques involve investing excess cash in higher-yielding assets such as money market funds, short-term bonds, or commercial paper. This can help generate additional income from the cash holdings and improve overall financial performance.

Active currency management is an approach that entails monitoring and adjusting foreign exchange exposures to take advantage of favorable exchange rates. Treasury teams can use this technique to manage currency risk and generate additional returns through currency trading.

Portfolio optimization involves analyzing cash balances and investment opportunities to identify the most attractive investments. By diversifying cash holdings and investing in a range of assets, buy-side firms can optimize returns and reduce risk.

Counterparty Risk Management

Active treasury management can help hedge funds mitigate counterparty risk and potentially generate higher returns. One important aspect of active treasury management is the monitoring of counterparty risk. This involves ongoing due diligence on counterparties to assess creditworthiness and other relevant factors. By actively monitoring counterparty risk, hedge funds can identify potential risks earlier and take steps to reduce exposure to risky counterparties.

In addition to monitoring counterparty risk, the use of hedging strategies can be an effective way to mitigate counterparty risk. Hedging strategies can include the use of derivatives, such as credit default swaps, to transfer counterparty risk to a third party. By employing hedging strategies, hedge funds can reduce exposure to potential losses in the event of counterparty default, helping to protect portfolios and generate higher returns.

Best Practices for Active Treasury Management

• Monitor cash flow and liquidity: It is important to regularly monitor cash flow and liquidity to ensure the firm has enough funds to meet its obligations. Treasury teams should automate cash flow forecasting and use it to manage short-term funding needs.
• Utilize technology and automation: Technology and automation can help streamline treasury management processes, such as cash flow forecasting and risk analysis. Treasury team should leverage tools and platforms to improve efficiency and accuracy.
• Effective risk management: Treasury teams should identify and manage financial risks, such as interest rate risk, foreign exchange risk, credit risk, and counterparty risk. Teams should develop a risk management policy that outlines procedures for assessing, mitigating, and monitoring these risks.
• Monitor regulatory changes: Treasury teams should stay up to date with regulatory changes that may impact the firm’s cash management, risk management, and investment strategies. Teams should assess the impact of these changes on the firm’s treasury management and develop strategies to comply with new regulations.
• Regularly review and assess performance: Treasury teams should regularly review and assess the performance of treasury operations. The focus should be on continuous optimization of the procedures for processing payments, reconciling bank accounts, and reporting cash balances and other treasury activities.

Treasury management will remain a key area of focus for buy-side firms as they continue to navigate the current environment. Asset managers must be prepared to navigate increasing complexities in treasury functions. Leveraging digital-first providers to optimize treasury workflows is a strategy asset managers can’t afford to ignore. These providers can help asset managers realize supplemental alpha, operational efficiencies, and reduced counterparty risk, all of which create a competitive advantage.

Working with some of the world’s largest hedge funds, IVP has helped treasury managers overcome these complexities and elevate treasury efficiency with the IVP Treasury Management solution. With the IVP Treasury Management solution, funds can increase control over treasury workflow, improve data quality, accelerate decision-making with real-time connectivity and reporting, and ultimately uncover treasury alpha with advanced analytics.

Providing a leading combination of best-in-class analytics, data management, and managed services, IVP Treasury Management empowers both single and multi-strategy hedge funds to track, control, and optimize a full suite of treasury functions.

Learn more about the benefits of IVP Treasury Management or contact us at sales@ivp.in