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Strategic Cash Diversification: Beyond Risk Management to Social Impact

In early 2023, the collapse of institutions like Silicon Valley Bank and Signature Bank served as a stark reminder that diversification is more than an “Investing 101” principle — it’s a strategic imperative. As asset managers and hedge funds continue to reassess their approach to cash deposits amid ongoing banking turmoil, the focus has expanded beyond risk mitigation. This blog explores the multifaceted layers of strategic cash diversification, uncovering important capabilities and delving into a holistic approach that asset managers and hedge funds can adopt to improve performance while making a valuable social impact.

Broader Considerations of Cash Management

The benefits of strategic cash diversification go beyond the traditional goal of mitigating systemic financial risks. While protecting against bank failures is paramount, strategic cash management also guards against reputational risks, security breaches, and catastrophic events.

Moreover, there is an even less widely known — but highly impactful — environmental, social, and governance (ESG) benefit. Diversifying cash holdings provides an opportunity to improve a company’s social impact by channeling funds to close wealth gaps, build resilient communities, combat the climate crisis, and support affordable housing.

Platforms like CNote, for example, offer “Impact Cash” deployments that spread funds across FDIC- and NCUA-insured community development finance institutions (CDFIs), which in turn fund women- and minority-led small businesses, affordable housing, and economic development projects. Through this approach to cash diversification, low-income designated credit unions and minority depository institutions become more vital players in the financial ecosystem.

Assessing Diversification Options

Fund and asset managers can diversify cash holdings with a broad spectrum of instruments, ranging from treasury bills and money market funds (MMF) to agency notes. In the United States, tools like the Certificate of Deposit Account Registry Service (CDARS) facilitate insured CD investments across multiple banks. Additionally, diversifying cash holdings across depository institutions can maximize FDIC insurance, either through a sweep account with an existing bank partner or through a specialized vendor.

Optimizing Diversification

In the quest for secure cash holdings, there is a common misconception that “too big to fail” banks are the only reliable option. However, analyses commissioned by the US Treasury Department’s CDFI Fund revealed that community finance institutions pose no more risk of failure than their traditional counterparts. Credit unions, for example, have a 91% deposit insurance rate, are notably resilient, and should not be overlooked. Community finance institutions should be viewed as an additional asset class, one that enhances cash diversification and provides measurable impact.

Right now, as treasury teams scrutinize safeguards for cash holdings, is an opportune moment for asset managers and hedge funds to optimize both financial security and social performance. Strategic cash diversification is a powerful tool in this regard, offering a comprehensive approach that extends beyond risk management to encompass broader considerations of social impact, resilience, and responsible financial stewardship.

Overall, strategic cash diversification can be not just a reaction to banking turmoil but a proactive and holistic financial strategy. Asset managers and hedge funds stand at the intersection of financial responsibility and social impact, where optimizing cash holdings can create a meaningful ripple effect in both the financial and social spheres. It is a paradigm shift that aligns financial goals with the broader responsibility of contributing to a more resilient, inclusive, and sustainable global economy.

How IVP Can Help

The IVP Cash Management Solution can serve as a catalyst for streamlined, efficient cash management. This comprehensive and fully customizable solution accelerates cash management with features like straight-through processing (STP) via the SWIFT payment process while also minimizing touchpoints, eliminating errors, and improving security with complete audit trails.

As an integrated platform, it unifies cash, security, and FX movements, giving asset managers and hedge funds a centralized solution for risk control and regulatory compliance. Remote access via the IVP Cash Management mobile application empowers decision-makers with real-time connectivity and reporting, optimizing daily workflows and contributing to increased profitability. As asset managers and hedge funds navigate the complexities of cash diversification, the IVP Cash Management Solutions offers a truly transformative tool for financial resilience and social impact.

Learn more about the IVP Cash Management Solution right now or contact us at sales@ivp.in to set up a live or online demo.

Cash Management Solution

A customizable cash management solution for processing payments and monitoring balances via STP. This ISO 20022-compliant solution centralizes balances for unified risk control and regulatory compliance and ensures that counterparty data is validated once and then made instantly available for future automated payments based on configurable rules. A comprehensive and customizable solution for cash settlements, balance monitoring, and straight-through processing (STP). Our cash management solution includes features like SWIFT payment processing and ensures that counterparty data is validated once and then made instantly available for future automated payments based on configurable rules. The solution centralizes all balances, providing unified risk control and regulatory compliance.

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