Liquid focus has paid off for Fohfs

Date: Thursday, July 15, 2010
Author: Amanda Smith, MoneyMarketing

Fund of hedge funds that restrict investment to more liquid strategies such as long/short equity and global macro to improve liquidity have not suffered in performance terms, according to S&P Fund Services.

The firm’s latest review of funds of hedge funds points out that fund of hedge fund managers have taken a variety of steps to improve liquidity since 2008. These include a focus on more liquid strategies, the creation of new Ucits III-regulated products and the use of managed accounts.
Managed accounts are segregated mandates run by underlying hedge fund managers but owned by the fund of hedge funds, which helps the management of liquidity in the overall portfolio.

S&P says investing only in more liquid strategies rather than the whole spectrum has not had a negative impact on performance. If anything, it says there is more potential for liquid strategies to outperform.

S&P Fund Services lead analyst Randal Goldsmith says the Antarctica marketneutral fund, which has had significant liquidity problems, put its illiquid holdings into a sidepocket and went on to produce strong returns as its more liquid assets recovered in 2009.

Sidepocketing involves putting illiquid or difficult-to-value assets into a separate account from more liquid investments. S&P says it will not rate a fund if it has more than 20 per cent of its net asset value in a sidepocket. For this reason, it does not currently rate the Antarctica fund.

The latest S&P fund of hedge funds rev-iew is the first to compare performance of the funds over the same time periods. Previous reviews looked at performance against their own objectives and on an absolute return basis.