Liquidity key to hedge fund investment, Preqin survey reveals

Date: Tuesday, September 13, 2011
Author: Martin Leonard, COO Connect

Investors are increasingly demanding greater liquidity as a condition for allocating capital to hedge funds, according to research specialists Preqin.

Some 75% of investors surveyed said liquidity was an important issue with 34% adding it was their greatest concern. These liquidity demands were driving the growth in managed accounts and Ucits vehicles, the report highlighted.

However, gating of assets by many hedge funds during the crisis has still not deterred investors with 54% of investors who had been gated saying they would consider a fund with gating clauses in the future.

Approximately 30% of those polled also said they would not put capital into fund, which allowed lock-ups. Only 6% of investors acknowledged they would consider managers with lock-ups longer than 24 months. Many investors are demanding reduced management and performance fees in exchange for agreeing to these lock-ups.

Quarterly redemptions were satisfactory among 46% of respondents while 32% preferred monthly redemptions. However, “a small but significant group of investors will consider annual or biannual redemption periods.”

These investor concerns have been noted by managers. In a separate survey of hedge fund managers by Preqin, 30% claimed they had shortened redemption periods since 2008 while 53% acknowledged they did not lock-up institutional capital. Furthermore, 44% of managers stressed liquidity was something they paid a lot of attention to.

“The majority of investors have increased their liquidity requirements following the market downturn and the demand for funds with shorter lock-up periods and greater flexibility in terms of redemptions has grown in the years since 2008,” said Amy Bensted, manager of hedge fund data at Preqin.

“Those funds that have adopted better liquidity terms for their investors have been more successful in gaining institutional capital, while demand for increased liquidity is also driving the growth of specialist structures such as managed accounts and Ucits. Investors are demonstrating flexibility, with a significant number willing to compromise their liquidity demands in return for more favourable fund terms elsewhere. Ultimately, however, managers that understand the needs of investors and adapt their products accordingly will be the most successful in attracting institutional capital,” she added.