FoHFs Cope With, Without Lockups

Date: Thursday, September 13, 2007
Author: Hedge Fund Daily

Funds of hedge funds, especially big ones, are coping surprising well in the face of redemption requests even though they lack lock-ups as hedge funds do, according to bfinance. Interviews with several FoHFs reveal that they have ways of stemming the tide of withdrawals in these trying times when investors en masse are clamoring for their cash. One method, notes bfinance, is the automatic gate feature, which allows an FoHF to plug redemptions once requests reach a certain percentage of total assets. In the case of Gottex Market Neutral Fund, that’s 10% of $7 billion. Oddly enough, Gottex’s assets actually grew in August, with net inflows of $400 million at the most volatile time. “What we are seeing is that our underlying managers may take a little longer to pay,” says partner Max Gottschalk, “so we may make sure that the investments we have match the liquidity needs of our clients.” Gottschalk adds that his firm tends to avoid hedge funds with lockups, with “more than half” of its investments in monthly liquidity HFs. He credits the inflows in part to “diversification attributes” of its underlying funds. The publication notes that the “liquidity mismatch” between funds of hedge funds, which for the most part have no lockups, and their underlying assets has been on the rise in recent years, especially as FoHFs are investing by growing numbers in activist hedge funds, most of which have lockups. “In the current environment,” one manager told bfinance, “an FoHF wants to have lockups, because in times like this, most investors become short-term.”