Liquidity Is leading concern of institutional hedge fund investors

Date: Wednesday, September 14, 2011
Author: HedgeWeek

Some 75% of investors are looking for greater liquidity in their hedge fund investments following the financial crisis, according to the latest Preqin study.

Funds with lock-up periods are now considered less favourable amongst investors as they seek the flexibility to exit their investments at their own discretion.

Although some investors are prepared to compromise on their liquidity demands when offered more favourable terms in other areas, 34% place the priority on liquidity.

The study found that 30% of investors will not consider investing in funds with a lock-up period, and only 6% will invest in a vehicle with a lock-up period of over 24 months. In addition, 46% of investors stated a preference for quarterly redemptions, while 32% seek access to funds with monthly redemptions.

Some 42% would also be willing to accept longer lock-ups in return for lower management fees, while 38% felt the same about performance fees, while 12% will only consider investing in liquid strategies at this time.

A total of 54% of investors have invested in a fund which gated assets. The same proportion of investors would consider a fund with gating clauses in the future, suggesting for many investors the gates of the past have not deterred their appetite in the future.

Almost one-third (30%) of hedge fund managers have shortened redemption periods since 2008, while 44% of hedge fund managers rate liquidity as something they pay a high level of attention to. Some 53% of funds meanwhile, do not lock-up institutional capital.

"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," says. Amy Benstead, manager - 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."