Global Liquidity Guide Series: Short-term Investment Strategies to Manage Financial Risk

Global Liquidity Guide Series: Short-term Investment Strategies to Manage Financial Risk

Introduction
This paper is intended to give the reader the tools to 
develop an investment strategy for managing global 
cash and the associated financial risks. In this paper, 
short-term is defined as any period up to one year.
There are a number of common scenarios in which an 
investment decision is required. These include:
■ the investment of overnight surplus cash;
■ the investment of general working capital;
■ the investment of funds set aside for a particular 
purpose (e.g. to fund an acquisition or to return to 
shareholders); and
■ the investment of funds received from a recent 
divestment.
At first sight, all these circumstances appear to suggest 
different investment strategies. The nature of the 
cash being invested is different, the timescales are 
different and the level of risk an organization might 
be prepared to accept may be different.
Yet it is possible, indeed desirable, to approach each 
investment decision with a single strategy. Having a 
single short-term investment policy, irrespective of 
the investment circumstances, will allow the treasury 
team responsible for investing cash to manage the 
investment risk in a consistent manner.

Today’s strategic treasurers understand that all short-

term investment decisions are fundamentally about 
managing risk. In every case, the cash to be invested 
over the short term must be placed somewhere. This 
may be ‘idle’ in the company’s checking account, 
swept to a money market account or overnight 
deposit account, or invested in a range of short-term 
investment instruments. Whatever the decision made, 
the treasurer will need to have a clear understanding 
of the fundamental objectives of investing: 
maintaining principal, ensuring liquidity, and 
maximizing yield. The treasurer must also recognize 
that, just as there will be risks when choosing to 
invest in particular instruments, so there are risks in 
choosing (whether actively or passively) to keep cash 
wherever it happens to be.
“All short-term investment 
decisions are fundamentally 
about managing risk.”

Setting and Implementing 
Investment Strategies
The treasurer can work together with the CFO 
with, in many instances, the board’s prior approval, 
to develop a short-term investment strategy, an 
investment policy and a set of operating procedures. 
The treasurer will be best placed to drive this process, 
given that the primary focus of any short-term 
investment strategy should be to manage risk in the 
context of the company’s risk appetite.
The Strategy-Setting Process
The first stage will be to agree an overarching 
short-term investment strategy. This will reflect the 
organization’s risk appetite and will provide the 
guidelines for the treasury to develop the investment 
policy. It is preferable that the strategy and, ideally, 
the policy also, is approved at board level.
The short-term investment strategy
The short-term investment strategy and policy are 
key parts of the organization’s approach to working 
capital management. In terms of documentation, the 
short-term investment strategy need be little more 
than a board minute. This should simply state the 
degree to which the treasury should focus on each of 
the three investment objectives, and should reflect the 
wider risk appetite within the organization. The real 
detail will be incorporated into the investment policy 
and day-to-day operating procedures.

The Policy-Setting Process
Once the company has established and documented 
its risk appetite, the treasurer can work to develop 
a short-term investment policy. In terms of process, 
the best way to do this is for the treasurer, together 
with appropriate other colleagues (who might include 
the CFO or a treasury committee of the board), 
to develop a policy. The policy should then be put 
forward for board level approval. Again, the precise 
process will depend on the structure and culture 
of the company. Some companies require treasury 
policies to be formally approved by the full board; 
others are happy to devolve decision-making to a 
board-level committee. 
The investment policy should seek to address the risks 
outlined below. Once the policy has been approved 
at senior level, it is usually appropriate to devolve 
the approval of detailed operating procedures to the 
CFO and the treasurer (depending on the size of the 
organization).

Global Liquidity Guide Series: Short-term Investment Strategies to Manage Financial Risk