Hi,
The study text says:
“Derivative positions in index futures can be used to reduce cash drag”.
I know what cash drag is, but I didn’t quite understand this statement, can any of you guys please elaborate on how this works?
Regards,
If the cash is not invested, it creates the cash drag.
So, for the fund to remain fully invested in the index, you will long futures on the index (based on the uninvested cash) to replicate the index return, and after depositing the margin with the clearinghouse, the remaining cash can be used for operational purposes (and not having to worry so much about the cash drag effect).