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Daily Liquidity and Hedge Funds


Date: Thursday, October 6, 2011
Author: Bill McIntosh, The Hedge Fund Journal

Get this. One of the leading bloggers of the financial commentary universe is a guy from Thomson Reuters named Felix Salmon. He’s a genuine superstar and a must read among the astounding array of news and information Reuters publishes. Rarely, however, has the esteemed news service fallen into the trap of publishing outright disinformation. Until now, that is.

Salmon has some pretty decent criticisms of funds of hedge funds, specifically, and the hedge fund industry more generally. In this respect, he’s far from being alone. But it is important to correct a few misleading assertions Salmon made in a recent column and challenge his proposition that the mass affluent shouldn’t invest in hedge funds.

"Let’s grant, for the sake of argument, that 'there is no shortage of excellent hedge funds to choose from'. It’s a long, long way from there to saying that there’s any overlap at all between the set of excellent hedge funds, on the one hand, and the set of funds which come in registered vehicles and offer daily NAVs and daily liquidity, on the other. In fact, I feel quite comfortable in saying that no excellent hedge fund offers daily liquidity." (emphasis added)

Where to begin? For one thing, Salmon’s sweeping claim is plainly wrong. One obvious example of an ‘excellent’ hedge fund offering daily liquidity is the Brevan Howard Master Fund through its London Stock Exchange listed vehicle BH Macro Ltd. But BH Macro with assets of $2.1 billion goes further than offering daily liquidity: it offers second-by-second dealing when the LSE is open. Salmon being Stateside must be unfamiliar with Europe’s third biggest hedge fund group (and the world’s largest macro fund with $25 billion) but the firm’s founder and chief trader Alan Howard hasn’t entirely escaped attention other there: he is an appointed advisor to the Federal Reserve. Just for the record, BH Macro has returned nearly 100% in the nearly five years since its LSE listing in early 2007 and its risk framework is well regarded (with a Sharpe ratio of 2.03 at 31 Aug).

To be fair, much of Salmon’s criticism is directed at funds of funds and the fee gouging practices of wealth management arms of the various banks that sell multi-manager products to their well healed private clients. It’s true that the latter, in particular, are an expensive way to invest in hedge funds. But it is equally true that funds of funds have changed comprehensibly. Liquidity is greater; transparency and due diligence are better; fees and terms are more flexible.

But beyond Brevan Howard, various single and multi-manger funds (BlueCrest Capital and Dexion Capital spring to mind) offer daily liquidity and strong risk management. They are worthy of consideration by any private investor. What’s more, through UCTIS an entirely new sector of hedge fund-like products have opened onshore in Europe in recent years. Most offer daily liquidity and all are subject to tight risk limits. Indeed, we have a database of over 400 such funds at www.ucitshedgefunds.com. For Salmon or anyone else who is interested please get in touch to arrange a free demo account.