Cash Neutral

What Is Cash Neutral?

The term cash neutral refers to an investment strategy that involves the sale and purchase of securities in an investment portfolio that results in no net cash.

Understanding Cash Neutral

In a cash neutral strategy, the long and short positions in an investor's portfolio are repositioned to effectively cancel each other out. From an accounting perspective, the transaction(s) make it seem as though no cash or capital is allotted to the trading positions. Investors take a cash neutral position in order to to be neutral to market movements or, in some cases, to leverage investing money.

Cash neutral transactions are generally made to reposition an investor's portfolio. By pairing transactions, the structure of the portfolio can be shifted from the existing holdings to new assets. These kinds of transactions are commonly made by buying and selling financial instruments at the same time.

Cash can be generated in some cases from the current holdings without actually selling them, as with a short sale of borrowed stock that matches stock owned in the portfolio. Keeping portfolios 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 decide to sell one asset to buy another.

Depending on your personal view of investing, this can seem like an optimal way to force real decisions. That's because it can help you remain neutral to any adverse changes, volatility, or movements in the market. But on the other hand, 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.

As noted above, being cash neutral can also mean leveraging existing holdings by making additional purchases in an investment 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.

A corporation can be cash neutral by moving excess cash out of the company and back to investors through repurchases or dividends.

Cash Neutral and Hedge Funds

Hedge funds use a variation of generating cash from their portfolios by short-selling portions of their holdings. This happens by 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. 

Cash Neutral As a Corporate Goal

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.

In 2018, the term cash neutral gained a new meaning as a corporate goal. Apple's chief financial officer (CFO) 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.

Apple's cash hoard reached $195 billion in January 2021. To achieve its goal of net cash neutral, the company will need to reduce cash through dividends and share repurchases or by increasing its debt by issuing more commercial paper. The assumption is that Apple will attempt to go cash neutral by returning more money to its shareholders.

Over $30 billion

The amount of cash Apple returned to shareholders during Q1 2021.

Cash Neutral Example

Here's a hypothetical example to show how cash neutral transactions work. Let's say a trader wants to reposition their portfolio but doesn't want to end up with any excess capital. If they sell a stock short, then buy a number of different stocks valued at the same amount as those sold short, the trader's account is considered cash neutral.

That's because the trader now has two positions, but the broker's accounting still considers the trader to have the same amount of cash in that account as before the two positions were established.