Should Treasury be an alpha-generating function or purely operational?

As hedge funds and asset managers look for new ways to enhance returns, the question of whether Treasury should remain purely operational or evolve into an alpha-generating function has become increasingly relevant.

Treasury has the ability to generate alpha, but some Fund Managers may still wonder if it should be designated and developed as a revenue-generating function. This is rooted in the desire to mitigate exposure and manage risk when investing the treasury portfolio. Although the prospect of making easy wins off a very large capital base is enticing, the idea of losing even 1% of assets under management is concurrently unappealing. There is also a stigma born out of the etymology of the word treasury, i.e., that assets and valuables are to be stored and not used. This stigma is only furthered by the fact that Treasury and Portfolio Finance teams have historically grown with a focus on cash management and the ability to finance trades. If funds were to hire more proactively and look to bring in individuals with wider skillsets, then taking such risks as the Portfolio Managers do would be a more attractive proposition. Doing so and looking to hire professionals with risk-taking expertise would certainly present some initial issues, given the disparity in compensation between risk-takers and non-risk-takers for one, but as a medium-long-term concept, it would surely find some success. 

Where is treasury best placed to be alpha-generating? 

It is unfortunately not the case that every single type of fund and investment vehicle would benefit extensively and find value in constructing an alpha generating treasury function, as there needs to be the right environment for the fund to facilitate the alpha generation. For example, one could argue that a small L/S credit hedge fund would most likely achieve everything needed from outsourcing cash and collateral management and counterparty risk management. Popular options for smaller funds include Hazeltree, Kaurika, Arcesium, Coremont and Orchestrade. However, most funds can benefit, especially where they have a large amount of unencumbered cash, multiple prime brokers, or a need to access the balance sheet, to name a few relevant areas. 

A large fixed-income relative value fund would derive exceptional value in a competent Treasury function, as there are multiple opportunities for the Treasury professionals to generate alpha. For example, a Repo Trader at a $20bn fund centralised the treasury book funding, aggregating the positions facing the street. Adding more broker entities can also increase funding capacity, and one individual created an internal market-making function, offering overnight mid +/- bid/offer spreads to individual trading teams. In an equities fund, a Portfolio Finance Trader can add significant benefit by analysing trading vehicles based on different factors such as financing costs, liquidity, holding periods and charges. They might also refine and improve PB relationships, perform cost analysis on different hedging instruments and, where allowed, some form close partnerships with Delta One PMs to provide market colour on financing markets. These partnerships could also be progressed, and the fund would yield the benefit of both a PM being well-informed on pertinent market moves and of a Portfolio Finance Trader developing their own potential to become a risk-taker and subsequently provide additional value to the business. 

Ultimately, whether Treasury should be an alpha-generating function depends on each fund’s structure, mandate, and risk appetite. But, as balance sheet optimisation and financing efficiency continue to grow in strategic importance, Treasury’s role is likely to expand — not just as an operational backbone, but as a genuine contributor to performance.