What Is Cash Neutral?

The term cash neutral refers to an investment strategy that ꧋involves the sale and purchase of securities in an investment portfolio that results in zer♋o net cash.

Understanding Cash Neutral

In a cash-neutral strategy, the 澳洲幸运5开奖号码历史查询:long and short positions in an investor's 澳洲幸运5开奖号码历史查询:portfolio are repositioned to effectively cancel each other out. From an accounting perspective, the transactions make it seem as though no cash or capital is allotted to the trading positions. Investors take a cash-neutral position to be neutral to market movements or, in some cases, to leverage investing money.

Cash-neutral transactions are generally made to reposition an investor's portfolio. By pairing 澳洲幸运5开奖号码历史查询:transactions, the structure of the portfolio can be shifted from the existing holdings to new assets. These kinds of transactions are commonly made by buying and selling financial instruments at the same time.

Cash can be generated in some cases from the current holdings without actually selling them, as with a 澳洲幸运5开奖号码历史查询:short sale of borrowed stock that matches stock owned in the portfolio. Keeping portfolios cash neutral can mean having the capital fully deployed in inv🍃estments at all tꦺimes. Rather than moving cash in and out as positions shift, an investor must decide to sell one asset to buy another.

Depending on a trader's personal view of investing, this can seem like an optimal way to force real decisions. That's because it can help an investor remain neutral to any adverse changes, 澳洲幸运5开奖号码历史查询:volatility, o🎀r movements in the market. But on the other hand, it can present a problem in that bad decisions can have a dual impact if a good asset is sold to purchase a poorly performing one.

Being cash neutral can also mean 澳洲幸运5开奖号码历史查询:leveraging existing holdings by making additional purchases in an investment portfolio. If the proceeds from selling options on ho🔥ldings are being used to buy additional stocks, for example, then the purchases do not require cash to be added to the portfolio.

Cash Neutral and Hedge Funds

Hedge funds generate cash from their portfolios by short-selling portions of their holdings. This happens by borrowing the same amount of shares that they hold and selling those shares on the market for cash to invest elsewhere.

This allows hedge funds to have cash on hand without actually selling holdings. They can neutralize the impact of the 澳洲幸运5开奖号码历史查询:underperforming positions with the short sale, then redeploy that capital on new🔯 investment with potentially higher returns. 

Cash Neutral As a Corporate Goal

Investors generally want to see cash reinvested in the business to drive growth if there are good uses for it. These uses can include 澳洲幸运5开奖号码历史查询:acquisitions that expand the company’s market or even more 澳洲幸运5开奖号码历史查询:research and development (R&D). If there are no investments within the business thatꦿ can be made to accelerate growth, then investors generally want to see that cash returned to them rather t🎃han invested poorly.

As a company grows larger, t🍷he ability to accelerate growth through acquisition or investment fades. When that happens, cash begins to build up in the business, as does th🐼e pressure to do something about it.

In 2018, the term cash neutral gained a new meaning as a corporate goal. Apple's 澳洲幸运5开奖号码历史查询:chief financial officer (CFO) used the term net cash neutral to describe the company’s goal of reducing its massive stockpile of undeployed capital. In this case, net cash refers to the excess cash that a company holds bey🎶ond its debt and oper🌱ating capital needs.

Apple's cash hoard reached $195 billion in January 2021. To achieve its goal of net cash neutrality, the company will need to reduce cash through 澳洲幸运5开奖号码历史查询:dividends and 澳洲幸运5开奖号码历史查询:share repurchases or by increasing its debt by issuing more commercial paper. The assumption is that Apple will attempt to go cash-neutral by returning more money to its shareholders.

Cash Neutral Example

Suppose a trader wants to reposition their portfolio but doesn't want to end up with any excess capital. If they sell a stock short, then buy a number of different stocks valued at the same amount as those sold short, th🍌e trader's account is considered cash 𒉰neutral.

That's because the trader now has two positions, but the broker's accou🃏nting still considers the trader to have the same amount of cash in that account as before the two positions 🐈were established.

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