1. GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 1
Sponsor: www.RenovatioAM.com
Newport Beach, CA

2. “A Risk-Driven Paradigm
For Cash Management”
Cash management investment policies may include
risk-driven constraints allowing alternative strategies.
Pension and endowment liability-driven policies,
treasury excess cash and capital budgeting projects
and fund of fund redemption vehicles share a
common framework for decision-making
GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 2
Newport Beach, CA

3. GARP: Pelican Hill, 26May2011
Presented: Pj de Marigny
3
ALTERNATIVES AS ENHANCED CASH VEHICLES
1 – HEDGE FUNDS
e.g. Market Neutral (Quantitative Methods of Speculation)
Fundamental, Paired and Quantitative Long Short
2 - OVERLAY Strategies (Equity with Derivative Overlays)
3 – Structured Products (Embedded Derivative Products to pre-fab a desired payout)
4 – SWAPS (VOL, Equity, FI, Commodity, Currency, FI Derivatives/CDS)
Newport Beach, CA

4. GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 4
ENHANCED CASH RISK CONSIDERATIONS
1 – HEDGE FUNDS
Market Neutral (Quantitative Methods of Speculation)
A – Third and fourth moment risks are not apparent
B - Distributions are assymetric as with any downside protected strategy
C – Systematic risk reflected in beta may not be statistically significant
D – Allocation optimization note: Remove treasuries, cash equivalents,
and rerun optimizer using semi-variance instead of variance to adjust for
downside protected vehicles that use shorts.
Newport Beach, CA

5. GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 5
ENHANCED CASH RISK CONSIDERATIONS
2 - OVERLAY Strategies (Equity with Derivative Overlays)
A - Write and roll: VOL ARB risks, may have model risks (GARCH)
B - Speculative overlay: Working on own P&L to a target return, may
overwrite adding upside risk similar to Convertible Arb with short call
overlay (gamma risks)
C – Overlay stand alone strategies: Tradeoff FI risks to Equity Risks
Newport Beach, CA

6. GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 6
ENHANCED CASH RISK CONSIDERATIONS
3 – Structured Products (Embedded Derivative Products to pre-fab a desired payout)
A - Liquidity: Maturities vary, firm may be only market maker or not traded
B - Inactive management: Similar to CEF with embedded options
C – Selection basket or index may have leverage or unwanted
characteristics
Newport Beach, CA

7. GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 7
ENHANCED CASH - RISK CONSIDERATIONS
4 – SWAPS (VOL, Equity, FI, Commodity, Currency, FI Derivatives)
Should NEVER be used as Cash Enhancers, these are risk diversifiers
Corporate treasurers employ Operating CF forecast models
Pensions employ ABO/PBO modeling
Endowments/Foundations use consultants and allocation optimization
Fund of Funds employ redemption modeling based on markets
Newport Beach, CA

8. GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 8
ENHANCED CASH PARADIGM
PENSION and ENDOWMENTS - Typically will have a Liability-Driven Policy that
may include a fixed income allocation with matched duration (immunized) or
dedicated to a funding. Cash is needed to fund ongoing mandated liabilities.
FUND of FUNDS REDEMPTION VEHICLE – Typically used by funds to offer
liquidity when underlying strategies have gates, lockups, or are not conducive to
redemptions during drawdowns. Cash is needed to fund redemptions.
TREASURY – Operating budgets, CAPEX and Capital Budget projects, Pensions,
Cash Flow from/to Operations. Cash is needed to fund operations.
Newport Beach, CA

9. GARP: Pelican Hill, 26May2011 Presented: Pj de Marigny 9
ENHANCED CASH FLOAT
THREE FLOAT MODEL
A – OPERATIONAL FLOAT
What is expected to be needed within one standard deviation of monthly operating
expenditures. Composed of typical corporate cash management vehicles and other
cash equivalents. (Assn of Financial Professionals publishes a list to members).
B – INTERMEDIATE FLOAT (ENHANCED CASH FLOAT)
The capital expenditures expected to be needed after 3 mos but less than 18 mos plus
>1σ – approx 1/3 of annualized expenditures). May be composed of alternatives with
betas about equal to MTNs or up to 1/3 market risk or less. This float is a secondary
or excess cash account and may be invested in “ENHANCED CASH” liquid vehicles.
C – SUSTAINABLE FLOAT (ENHANCED CASH FLOAT)
The float that tends to be steady or the minimum threshold that may be composed of
five year maturity investments. Structured Notes may be considered.
Newport Beach, CA