What Is Cash Neutral?

Cash neutral is a phrase which generally refers to one of several investment strategies that have a similar characteristic: the long positions and short positions in the portfolio (from the perspective of accounting) cancel each other out, and it is as if no cash is allotted to the trading positions. This is sometimes done to be neutral to market movements, and at other times done to leverage investing money.

How Cash Neutral Works

Cash neutral transactions are most often made by simultaneously buying and selling financial instruments. For example, if a trader were to sell a stock short and then buy a quantity of different stocks valued at the same amount as those sold short, the trader's account would be 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.

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 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, 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.

Cash Neutral As a Corporate Goal

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.