Strategies · Library · Cash
§17.3Liquidity
Liquidity management
Decide how much cash to keep so unexpected needs can be met without selling other assets at a cost. For companies, too little cash can mean lost opportunities or distress.
Open in the builderAs the book sets it out, long only.
- Asset class
- Cash
- Held for
- Varies
- Data
- ARCANE has the data
- Symphony
- Builds in the symphony builder
The rule
- Signal
- Expected liquidity needs and cost of selling other assets
- Entry and exit
- Hold a cash reserve and top it up as needs change
- Sizing
- Cash share set by need and risk tolerance
How it fails
- Cash drag in rising markets
- Inflation erodes cash
- Estimating needs
Data it needs
- cash flow needs
- return series of cash instruments
Treasury bill ETFs such as BIL are available.
How ARCANE uses it
Alpha could use it when sizing a cash buffer next to a Call. Paper only.
Builds in the symphony builder. A fixed split between an equity ETF and a Treasury bill ETF.
Filed under the liquidity card
Thinly traded assets pay a premium for being hard to sell. Hold them for it in calm markets; when trading thins across the market, cut size and move to the most liquid way to hold the view.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §17.3, p. 115 of the SSRN version. Described in our words. Liquidity is ARCANE’s filing, not the book’s.