Cash Neutral

Cash neutral is strategy in which an investor manages an investment portfolio without adding capital to it. Cash neutral can refer to a specific transaction within the portfolio that is made without requiring net cash or it can apply to the overall management of a portfolio. Cash neutral transactions are most often made by simultaneously buying and selling financial instruments. In some cases, this cash can be generated from the current holdings without actually selling them, as with a short sale of borrowed stock that matches stock owned in the portfolio. More recently, the term cash neutral has also been used to refer to the corporate goal of moving excess cash out of a company and back to investors through repurchases or dividends. 

Cash neutral transactions within a portfolio are generally made to reposition a portfolio. By pairing transactions, the makeup of the portfolio can be shifted from the existing holdings to new assets. Sometimes the term cash neutral is also applied to transactions where the existing holdings are leveraged to make additional purchases in the portfolio. If the proceeds from selling options on holdings are being used to buy additional stocks, for example, then the purchases do not require cash to be added to the portfolio.

Hedge funds use a variation of generating cash from their portfolios by short selling portions of their holdings, that is, 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 underperforming positions with the short sale, then redeploy that capital on a new investment with potentially higher returns.  

Keeping a portfolio cash neutral can mean having the capital fully deployed in investments at all times. Rather than moving cash in and out as positions shift, an investor must make a decision to sell one asset in order to buy another. Depending on your personal view of investing, this can seem like an optimal way to force real decisions, or 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.

In 2018, the term cash neutral gained a new meaning as a corporate goal. The chief financial officer for Apple 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 beyond its debt and operating capital needs. In general, investors want to see cash reinvested in the business to drive growth if there are good uses for it. These uses can include acquisitions that expand the company’s market or even more research and product development. If there are no investments within the business that can be made to accelerate growth, then investors generally want to see that cash returned to them rather than invested poorly.

As a company grows larger, the ability to accelerate growth through acquisition or investment fades. When that happens, cash begins to build up in the business, as does the pressure to do something about it. For Apple, this cash hoard reached $163 billion in February 2018. To achieve its goal of net cash neutral, Apple will need to reduce cash through dividends and share repurchases or increase its debt by issuing more commercial paper. The assumption is that Apple will attempt to go cash neutral by returning more money to shareholders.