Cash drag

Also seen as: drag, opportunity cost of cash

The more capital held back, and the stronger the market's move, the larger the drag.

How is cash drag calculated?

Cash drag over a window is approximately the cash share of capital multiplied by the market's return over the same window.

$$\key{1}{\text{cash drag}} \approx (1 - \key{2}{w}) \times \key{3}{r_{\text{market}}}$$

• the market return given up
• the share of capital put to work — a Combined's invested portion, or a single strategy's leverage below 1.00× — so 1 − w is the cash held back
• the market's return over the same dates

The invested portion is set per allocation profile. The relation is an approximation because it ignores compounding within the window and whatever the idle cash itself earns.

How does Fincanva handle it?

• The cash reserve is whatever the invested portion does not deploy: an invested portion of 75% leaves a 25% reserve — see Invested portion.
• A Risk-Off allocation profile commonly deploys less than its Risk-On twin, so drag typically appears in bursts, lasting as long as the strategy stays defensive — see Risk condition. A condition that flips in and out repeatedly turns those bursts into a recurring cost — see whipsaw.
• Leverage is the other dial on how much capital is at work: a multiplier below 1.00× leaves part of the capital uninvested, which is the same drag reached from the opposite end.
• Idle cash accrues interest only when the Costs & interests simulation assumption is on, and that assumption is off by default: on the figures you meet first the cash earns nothing and the drag is the whole forgone market return. Switch costs on and the drag becomes that return net of what the cash earned — see interest received and paid.
• The near-riskless short-term return that a cash-like holding is judged against is the risk-free rate.

What counts as a good value?

Cash drag has no target value — it is the price of holding a reserve, and it is only measurable after the fact. Read it against the reason the cash was held: over a window in which the market fell, the same reserve that "dragged" in a rally is what limited the fall. A strategy carrying a large permanent reserve shows drag in most rising windows; a strategy that only holds cash defensively shows it in bursts. Fincanva reports what happened; it does not tell you how much cash to hold.

What does it look like in practice?

A Combined switches to a defensive profile set to Lightly invested — 25% of capital deployed, 75% held as cash. Over the six months the Combined stays defensive the market rises 12%. The invested quarter captures its share of that rise; the three-quarters in cash captures none of it, so the forgone market return is roughly (1 − 0.25) × 12% = 9 percentage points.

Had the market instead fallen 12% over the same six months, the same 75% reserve would have avoided roughly 9 percentage points of the decline. The arithmetic is symmetric — only the market's direction decides which side of it you land on.

Fincanva does not tell you how much cash to hold.