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the Stock Market

When it comes to investing, “excess cash” refers to small pockets of money that accumulate over time. This may result from asset turnover or deposits that are never fully allocated to any particular asset. Since cash isn’t allocated to any asset, it just sits there, never collecting any returns.

To overcome the cash drag on their portfolios, investors can employ what’s called a cash equitization strategy. This strategy is designed to accelerate returns by reducing the drag on performance caused by excess cash holdings. By “equitizing” a portfolio, investors monitor their level of unintended cash and use those funds to purchase futures contracts or other derivatives products. By purchasing futures or other derivatives, investors can ensure their investment mirrors the underlying market in which the cash is supposed to be invested.

Of course, this is a simple explanation of how equitization works. In reality, portfolio managers use sophisticated techniques to utilize excess cash holdings as cheaply as possible. This means selecting futures that span several markets, including equities and fixed interest. In any case, monitoring the portfolio’s cash level continuously is necessary to ensure the equitization strategy succeeds. For this reason, it is usually left to professional portfolio managers. Retail investors can certainly pursue equitization, but they must be prepared to monitor their portfolios regularly to ensure proper coverage.