High inflation and interest rates over the last four years have made cash depreciate in value rapidly. Neil Gallacher, Co-Head of Cash Solutions at MillTech, explains why technology is the key for fund managers to protect and optimise their excess cash.
Inflation has turned cash into a silent risk for fund managers. What was once seen as a safe haven is now steadily eroding in value, and the longer managers stay on the sidelines, the greater the losses.
UK and US inflation has been flying steadily above the 2% mark since 2021: far above central banks’ targets. Inflation in the UK has also been rising steadily throughout this year, and the latest figures show it to be as high as 3.8% as of August.
Meanwhile, record levels of global dry powder, reaching $2.59 trillion, reveal just how much capital is sitting idle. For fund managers, that should be a wake-up call. Leaving cash in low-interest accounts or relying on a single provider is potentially a huge drag on performance.
But this doesn’t have to be the case. A new generation of technology-driven financial tools is helping managers reimagine cash management, unlocking greater efficiency, transparency and returns on every pound.
Hidden costs
Many fund manager teams still rely on manual, outdated processes to manage their excess cash. Some leave cash in low-interest accounts and watch it lose value.
Consider a fund with £100 million in idle cash. With inflation at 3.8% and a typical low-interest account yielding just 2.5%, the fund is effectively losing around £1.300,000 in purchasing power each year.
That’s value quietly eroded by inflation without a single transaction taking place. Over time, and especially across multiple cash holdings or regions, the cumulative impact becomes a significant drag on financial performance.
Others invest in products such as money market funds, which are designed to help funds earn interest on idle cash while preserving liquidity and aligning with inflation or interest rate shifts.
Yet, how they access these products hasn’t changed in line with advances in technology. Without the infrastructure, internal resources and relationships, these firms are missing out on potentially significant cash returns and governance enhancements.
Increasingly complex know your customer (KYC) and onboarding requirements also mean many firms rely on one or two counterparties, creating overconcentration, limiting diversification, and exposing them to avoidable counterparty risks.
In today’s environment, sticking to outdated workflows undermines funds’ ability to preserve and grow value.
Making the most of digital tools
Making better use of idle cash starts with better tools. Advances in financial technology are giving fund managers access to capabilities that were once reserved for larger institutions. However, large firms have seen fewer breakthroughs in tackling their most complex challenges, such as navigating fragmented market access, satisfying internal and external compliance and policy rules and integrating data from multiple sources.
Innovation in technology has gone beyond trading, portfolio and operation management systems. It’s no longer about cash management but cash optimisation. AI-powered engines can scrape information from various data sources and documents, and provide intelligent recommendations, giving fund managers the ability to act faster and enhance their decision-making. This wealth of data can be used for insights to improve short-term cash forecasts, allowing managers to see variances early and adjust investments, borrowings, or hedges automatically.
The widespread adoption of bank APIs is also powering fund managers to make more automated decisions. Rules-based trading, for example, can remove manual work and reduce risk, providing full audit trails and built-in regulatory compliance. This helps fund managers meet internal governance standards and external reporting requirements without adding complexity. These rules can adapt dynamically to market conditions, providing more agility and control over liquidity, leaving fund managers to focus on strategy while the engine handles routine allocations.
From passive to active
The fund manager’s role is evolving towards strategic optimisation. Basic and binary tools, such as single counterparty bank sweeps, have been replaced by systems offering consolidated access to cash deposits, money market funds, tokenised assets, and T-bills, all in one interface. This enables faster, more informed decisions and reduces the friction of managing fragmented systems or relying on outdated workflows. No longer bound by slow systems and siloed information, funds now have the tools to act with agility, precision and control.
Funds can now access tier-one counterparty agnostic solutions by wrapping institutional-grade solutions in a fintech model, simplifying market access despite increasing KYC and onboarding regulatory enforcement. Fintechs are uniquely positioned to erase all the operational burden, and deliver compliance, transparency and performance in a single workflow.
There’s still more to accomplish. Although systems have consolidated cross-product access, execution, oversight and reporting remain largely siloed. Further innovation in automation and allocation tools can remove the remaining manual processes that fund managers have.
In the current environment of high inflation and rates, leaving cash idle is costly. However, finance leaders can harness this opportunity to be more agile and proactive. Tools exist to streamline investment operations, bolster compliance and control and deliver more yield with less effort. Now is the time for fund managers and other institutional investors to take advantage of them.
Fund managers’ relationship to cash is evolving to become less transactional and more strategic. Funds now have the power to turn cash management into a lever for performance by adopting smarter tools, optimising liquidity and reducing risk. By taking a smarter approach to cash management, funds can safeguard their value today and free up more capital to fuel tomorrow’s growth.
*Group Hedged assets as of 31 January 2025 and is a combination of USD 15.7 billion hedged assets (all strategies that include hedging, up to the maximum amount that can be hedged) managed by Millennium Global Investments Limited and USD 12.6 billion managed by MillTech. Millennium Group comprises Millennium Global Investments Limited and Millennium Global Treasury Services Limited.
By Neil Gallacher, Co-Head of Cash Solutions at MillTech
