Co-authored by Greg Comiskey and Ben Pumfrett.
Asset managers remain under greater pressure to optimise costs and maximise performance. After an extended period of falling or near-zero interest rates, cash has re-emerged as a source of maximising the yield available, while volatility in FX markets presents significant alpha opportunities for those positioned to capitalise.
During the period post-2009 when low interest rates were prevalent, many investment managers dismantled their cash desks, taking cost savings while the market was flush with liquidity courtesy of central banks deep in crisis management mode. Custodian banks and service providers picked up the slack with outsourced cash and FX services, but these often delivered low returns as firms prioritised yield in other asset classes. When interest rates eventually rose, this shift was not met with an automatic or proportional increase in returns on idle cash.
Many asset managers still lack full or accurate visibility of intraday cash. To mitigate intraday movements—such as margin, collateral, and derivatives P&L—firms often maintain large “buffers.” This results in excess cash sitting in current accounts rather than being invested in overnight or short-term assets. In some cases, it can also lead to unintended overdrafts or balances on currencies with negative interest rates, creating unnecessary cost and dragging on performance.
These challenges persist even as firms push toward the utopia of the total portfolio view—an ambition often complicated by the very cash visibility issues they seek to resolve.
The Evolution of FX and Cash Management Solutions
For years, near-zero interest rates rendered active cash management a low priority for investment managers. There was virtually no return to be had, making the consequences of this largely immaterial. But as rates climbed from historic lows, many managers have found themselves caught off guard. Without internal capabilities, they were locked into arrangements where service providers—not their clients—are the chief beneficiaries of these conditions.
The absence of in-house FX and active cash management meant that “passive” FX—the mere conversion between instrument and portfolio currencies at the available market rate—became the default. While transactional FX mandates from custodians and service providers helped mitigate investors’ exposure to FX fluctuations, they also resulted in investors effectively paying the spread twice when buying and selling assets in the same market.
Things changed in 2022, when most major central banks rapidly began increasing interest rates, reaching 10- to 15-year highs that began to taper off in late 2024. Meanwhile, geopolitical developments such as US tariffs, or the threat of, have pushed volatility in FX rates up dramatically. As a result, savvy FX specialists once again found opportunities to generate alpha from a once-stagnant instrument class. Today, major service providers and platform providers are loudly touting their capabilities in active cash and FX, leaving little excuse for investment managers to allow inefficiencies in this area.
Rebuilding In-House FX and Cash Management Solutions
Investment managers that develop active cash and FX capabilities can generate performance gains and better position themselves for expansion into new products and instrument types. Key areas of focus include:
- Supporting Growth in Private Markets
Moves into real assets, repos, private equity and private credit require enhanced visibility on cash and FX. Running a loan book, delivering on capital calls, and managing multi-currency cash flows and debt payments all require in-house capability and direct connectivity to cash markets—something that cannot be easily outsourced.
- Enhancing IBOR Capabilities
Real-time visibility of balances is critical for intraday cash and FX management. Cut-offs for investments in overnight funds, as well as time deposits, and call account facilities require accurate data on tradable cash balances that should not require additional manual validation pre-trade.
Read more about IBOR
- Optimising Returns with In-House Expertise
Real-time balances are also an essential component to rebuilding in-house cash and FX capability, where a purpose-built investment desk with a degree of discretion in its ability to “shop around” for the best returns on idle cash is tasked with gaining portfolio alpha. Though a sufficient risk appetite on the part of the client and appropriate controls are required, a cash and FX desk can ensure that investment managers, rather than service providers, are the ones claiming returns for the whole portfolio.
- Exploring Tokenisation for Liquidity Management
Progress in the tokenisation of money market funds and their use as collateral offer an emerging alternative to holding excess cash. These instruments could help firms manage some of those intraday events that can supersede requirements to keep a cash balance.
Firms that continue to treat cash and FX as afterthoughts risk missing out on meaningful alpha opportunities. With market conditions favouring those equipped to act, investment managers have fewer excuses for allowing inefficiencies to persist.
Building internal capabilities in cash and FX management does more than enhance performance—it strengthens the broader operating model. For instance, achieving a whole portfolio view requires effective oversight of liquidity, collateral, and multi-currency cash flows. This ensures cash is working efficiently rather than sitting idle. Robust internal capabilities also improve risk management, support capital efficiency, and position firms to anticipate market shifts rather than react to them.
While outsourcing remains a valuable tool for optimising operations, firms must take a strategic approach—understanding where external providers add value and where in-house capabilities are critical to maintaining control over cost, risk, and performance.
A key consideration moving forward is that higher interest rates are likely to persist, with ongoing geopolitical developments contributing to continued FX volatility. The question for firms is: Will they pursue this opportunity for alpha?
Firms could do so by reinvesting in their internal treasury and cash functions. This would provide a more accurate cash projection view and enable better data to feed into external offerings and models. Alternatively, asset managers may choose to push external providers for more active services to stay competitive. Ultimately, the technology that enables a more accurate view of cash management is the foundation, and from there, the decision lies in choosing the right model for managing that data and optimising returns.
At Citisoft, we navigate these complexities alongside investment managers, ensuring that operational models are fit for purpose as market demands evolve. Whether assessing outsourcing strategies, redesigning operating models, or enhancing technology and data capabilities, we work with firms to build resilient and efficient investment operations that support long-term growth.
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