Idle cash between note maturities is costing me about 1.7 points a year

Cash drag is what 9 month paper costs you. You bought the right to get your money back four times faster than you can find a use for it and you're surprised the option has a price. When I hold land for eight years there's no reinvestment problem because there's nothing to reinvest. If the drag bothers you, buy longer duration and stop touching it.

Before anything else, does your 7.8% include the extension interest as received or as accrued? If one note extended twice and you haven't been paid the extension period yet, your realized number is understating you and your drag is smaller than you think. I got that wrong on a private note last year and spent a month solving a problem that wasn't there.

How did you get to 31 days average dead time? Is that from payoff posting to the next funding date, or from payoff posting to the day you committed? Those can be two weeks apart on some platforms because committed capital sits uninvested until the deal closes. If it's the second one, part of your drag is structural and no ladder fixes it.

I turned on auto-invest on one platform for exactly this reason and it cut my idle time to about 6 days. It also put me into two deals I would never have picked, one of which is now 40 days late on interest and sending me chirpy updates. So it worked on the metric I was measuring and gave me a different problem. Your option one is auto-invest with extra steps, be clear-eyed about that.

Sorry to slow the thread, what is cash drag exactly? Is it just money sitting in the account not earning anything, or is there a fee involved too?

@orchard I don't buy that framing. Short duration is doing real work here, tender gets to reprice every nine months and re-underwrite the sponsor each time. That's worth something in a market where nobody trusts a two year old appraisal.

@juniper it's just idle money. No fee, the balance simply earns nothing while it waits, so your return on the whole pot is lower than the rate on any single note.

tender, the number I'd want is not the average dead time. It's the distribution. If most payoffs redeploy in a week and one sat for four months, you have one bad month, not a systemic problem, and the fix is a rule for that one case. Pull the actual gaps note by note before you give up 140 basis points on 25k.

I track this as weighted average deployed percentage per month and it's the only number on my dashboard I actually look at. Mine runs about 91%. On 85k that's 7.6k of idle capital on average, which at 9.4% is roughly 715 a year of foregone interest. Your gap is bigger than that, which makes me think something else is in there too. Check whether the platforms are paying you from the funding date or from the closing date.

Genuine question about the extended note. When a borrower extends, there's usually an extension fee. Who gets it? I assumed the lenders but I've never seen it show up in a distribution.

@sable it depends entirely on the offering documents and it varies a lot. On the ones I've read, the extension fee goes to the platform or the affiliated originator as servicing income, and the investors get the same coupon for a longer period. Sometimes the coupon steps up 100 to 200 basis points on extension. Sometimes it doesn't move at all. The clause is usually two paragraphs from the default interest language, and default interest is often split the same way. Read those two clauses side by side before you fund anything, they tell you whose interests the extension serves.

tender, that also matters for your ladder question. If extensions are free to the borrower and profitable to the platform, your 9 month term is really a 9 to 18 month term and your ladder spacing is fiction.

@canton is pointing at the right thing. On two of the platforms I've used, interest to the investor starts on the closing date, and your money is called and held for anywhere from 3 to 20 days before that. Nobody advertises this. It's in the subscription mechanics, usually one sentence about funds being held in a non-interest bearing account pending closing. Twenty days a year on four rotations is nearly a month of dead capital that never appears in your dead-time calculation because your account showed the money as invested.

I'd add up those pending days across your rotations before choosing between your two options. My guess is a third of your gap lives there and neither option touches it.

The pooled fund idea is the part I don't understand. If you can request redemption quarterly, what price do you get out at? Is it whatever you put in, or does the fund mark the loans down if some go bad? I've read the phrase net asset value about fifty times and I still can't tell whether it moves.

@vellum it moves, or it should. Pooled debt funds carry the loans at some value and if borrowers stop paying, that value comes down, and your redemption is at the marked price on the request date. Whether the manager marks aggressively is a real question and the answer is in the valuation policy in the offering docs.

tender, your math. 6.6k on an average balance of 85k is 7.76%, fine. But average balance is doing hidden work. If your balance was 85k in month one and 61k in month seven because payoffs hadn't redeployed, then the average deployed capital was well under 85k and your return on deployed capital was closer to your stated rate. The 1.6 point gap is a return on committed capital, not a return on the notes. Both numbers are true and they answer different questions. If your alternative use of the idle cash is a savings account, then committed capital is the right denominator and you should care. If the alternative is nothing, you're beating yourself up over an accounting choice.

Reading all this I'd take the 8% and stop. You're spending real hours to defend 1.4 points on 25k, which is 350 a year. I know that's the unimpressive answer.

@meridian 350 a year for the rest of your investing life compounds into something less unimpressive, but I take your point about the hours.