This may sound like a basic question but I have seen many large institutional investors have this as part of their asset allocation and am wondering why they do this?

Does it make sense to have a large allocation to short term funds (such as repo and other short term fixed income instruments); and simultaneously have a similar notional amount in an unfunded position in another asset class.

When I say a large allocation, I mean on the order of 5% or more, and certainly more than an allocation that one would view as a checking account to meet any short term cash outflows.

Wouldn't the carry cost of having an unfunded position exceed any carry one might earn on having this excess liquidity position? Wouldn't it be more efficient just to reduce the allocation to the short term instruments and take a funded position instead? They would at least be able to recapture the bid ask spread between the short term instrument and the carry of the unfunded position (assuming they are funding with the same reference rate like repo). Wouldn't the excess liquidity allocation just be dead money since unfunded position requires carry?



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