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Alternative Market Briefing

Redemptions from low fee hedge funds could lead to 2%-3% drop in performance, says Melvyn Teo

Wednesday, April 21, 2010

From Sagar Chakraverty, Opalesque Asia:

“A lot of the low performance fee funds tend to have higher liquidity risks and this liquidity risk will translate into problems for investors when they attempt to pull money out of their fund.” This is what Melvyn Teo, associate professor of finance at Singapore Management University (SMU) shared with Opalesque’s founder Matthias Knab in a recent video interview (here).

Teo is involved in extensive research in finance and hedge funds, and also manages the BNP Paribas Hedge Fund Centre at the SMU. This centre runs seminar, conferences, and educational programs on hedge funds, and also conducts fund research.

In one of his recent research work, Teo looked into the veracity of the liquidity claim of hedge funds, especially those that raise gates and prevent investors from withdrawing money. He found that lots of the investments are fairly illiquid, and that there are huge deviations in the funds’ liquidity profile. He believes this liquidity exposure is related to agency problems, which arises when management and stockholders have conflicting ideas on how the company should be run.

Higher liquidity risk related to lower performance fees When investors pull money out from hedge funds that charge low performance fees, return of those funds tends to drop in the next month by 2% to 3%. This trend is stronger when stock market liquidit......................

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