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Cash neutral is a type of strategy that involves creating a set of buying and selling financial instruments in a combination that does not result in an actual increase or decrease for the investor. This approach involves no net cash, meaning that the investor’s net assets are not tied to the process at any point. Sometimes a cash-neutral strategy can be helpful in reorganizing assets, particularly hedges, in a way that positions the investor in the best possible light and paves the way for future returns.
One of the most common configurations of a cash neutral transaction is to combine the purchase of a new asset with a short sale of an asset already owned by the investor. The idea is that the combination results in a neutral situation in terms of impact on the portfolio. Although the investor loses money by short selling an asset, the plan is to make up the difference by purchasing another asset designed to generate returns to offset that loss through the short sale.
There are several potential benefits associated with using a cash neutral strategy, including the advantage of not having to delve into other assets to manage the purchase of the new asset. By buying and selling at the same time, there is no need to use liquid cash or even a margin account to manage the purchase. This means that the investor’s other assets remain in place and are not affected by the transactions in any way.
There are some potential downsides to a cash neutral strategy. If the acquired asset does not generate returns to offset the impact of the short sale, it will eventually generate a net loss. At the same time, if the idea was to get rid of a hedge fund or similar investment that was expected to lose value in the near future, it may be preferable to take the loss on the short sale compared to the larger losses that would occur if the active were held. . Before actually engaging in a cash-neutral strategy, investors should take the time to project all possible outcomes, weigh the risk associated with the activity, and then make an informed decision about whether or not to proceed.