As investors take a more active approach to their short-term portfolios, they must balance the potential for enhanced returns against risk and liquidity considerations.
Cash, a previously under-utilised and overlooked component of most investment portfolios, is a subject of intense focus for many institutional investors. The reason for the increased scrutiny is that investors have become more diligent in their pursuit of enhanced yields. As recent market events have underscored, however, the quest for improved performance also must consider evolving market risk and liquidity parameters.
Institutional investors such as corporations, governments, pension funds, local authorities, insurance companies and hedge funds have diverse investment horizons, liquidity needs, risk/return profiles and volatility tolerances. As a result, an array of investment solutions have been developed to accommodate these considerations as well as to provide an opportunity for increased returns.
“During the past decade, we have seen a proliferation of investment products that reflect growing market demand to provide a broader range of investment alternatives within the cash to short-duration portion of the yield curve,” says Steven Everett, Director of Balance Sheet Assets at Northern Trust. “Investment solutions vary from high-quality money market fund strategies with a constant net asset value to low-duration investment strategies with mark to market risk. Such strategies may employ leverage, greater credit risk and other portfolio management techniques to achieve their performance objective.”