Active Treasury Management 101

The concept of active treasury management has been around for at least a decade. It became popular after the 2008 financial crisis, when hedge funds and other types of financial firms were looking for new ways to ensure liquidity, manage counterparty risk exposure, reduce counterparty costs, and generate yield.

A lot has been written about the subject, but many financial professionals still aren’t aware of what active treasury management is and the benefits it can provide to organizations. In this article, we provide an easy-to-understand overview of it, along with information about how it drives value to your firm.

What Is active treasury management and how will it benefit my business?

Many asset managers have their treasury departments report into their operations units. They typically use manual spreadsheet-based processes that are prone to mistakes, time consuming, and inefficient. They respond to requests, oversee systematic transfers and check spreadsheets and other records for errors—this can be considered reactive treasury management.

Forward-looking asset managers, however, recognize the potential of their treasury function and are much more active when managing this function. They invest in technology that streamlines, automates, and optimizes their treasury function, freeing up time to focus on generating value and potential alpha.

This active form of managing treasury is often referred to as treasury profit and loss (treasury P&L) because it adds significant value, while protecting assets and reducing operational risks.

Typically, organizations that take an active approach to treasury management experience:

  • Lower counterparty risk exposure
  • Tighter operational controls
  • Increased operational efficiency
  • Enhanced incremental return on assets
  • Treasury P&L that can be measured between 50-75 bps

How does active treasury management add measurable value?

At the simplest level, asset managers who practice active treasury management focus on incremental P&L opportunities across these areas:

  • Tracking and identifying excess cash on an ongoing basis (typically daily) and collapsing debits and investing remaining excess in repos and money market funds
  • Actively disputing margin calls and recalling excess on OTC trades to minimize posted collateral requirements and redeploying excess (cash) collateral back into the fund as buying power
  • Optimizing their borrow costs by identifying the best borrow rates across their counterparties and either re-rating or moving securities
  • Tracking and reconciling prime broker margin and asset-based financing requirements

Active treasury teams leverage their technology to automatically identify these opportunities and take appropriate action to generate incremental value to their funds.

Hazeltree conducted a survey of more than 80 of the world’s leading hedge fund managers (with AUM ranging from $2 billion to over $50 billion). It found that most organizations that take an active approach to managing treasury add an incremental 30-100 basis points return on their assets. Think about how that kind of increase in return could benefit your bottom line.

Treasury has evolved to become a strategic function by not only reducing operational risks and protecting assets but also by generating significant P&L.

Contact a Hazeltree representative to learn more about active treasury management and how it could benefit your business.