Opalesque Industry Update - Here is a hint for those hedge funds struggling to find investors. According to the latest Preqin study, three-quarters of investors are seeking more liquidity in their hedge fund investments following the financial crisis – and those funds that have adopted better liquidity terms for their investors have been more successful in gaining institutional capital . |
Liquidity has taken a prominent importance in the industry: although some investors are prepared to compromise on their liquidity demands when offered more favourable terms in other areas, says the report, 34% place the priority on liquidity. 12% will only consider investing in liquid strategies at this time. Furthermore, almost half of hedge fund managers now rate liquidity as something they pay a high level of attention to.
Almost one-third of the investors will not consider investing in a hedge fund with a lock-up period. A lock-up period is a window of time in which investors are not allowed to redeem or sell shares, which can go up to two years if the underlying investments are very illiquid. Only 6% of the investors surveyed by Preqin will invest in a vehicle with a lock-up period of over 24 months. But 42% would be willing to accept longer lock-ups in return for lower management fees, while 38% felt the same about performance fees. And now, 53% of funds do not lock-up institutional capital.
Fees in fact are decreasing. They have been since the credit crisis. Hedge Fund Research (HFR), the Chicago-based data provider, has just confirmed this in a quarterly report: “Both management and incentive fees charged by hedge funds declined in 2Q , with incentive fees posting a more significant decline. Average incentive fees industry-wide declined to 18.81% in 2Q (from 18.95% in Q1); however, the average incentive fees of funds launched in the trailing 12 months was 17.56%, the lowest level since 2005. Average hedge fund management fees posted a narrow decline of 1 bp to 1.57%, while FoFs management fees were unchanged at 1.3%.”
Coming back to the Preqin survey, 46% of investors prefer the more common quarterly redemptions, while 32% would rather have monthly redemption terms. Meanwhile, 30% of hedge fund managers have shortened redemption periods since 2008.
According to the data providers HFN, Eurekahedge and HFR, allocations to hedge funds have been outpacing redemptions of late – despite several months of mediocre performance. Redemption dates for the hedge fund industry are 45 days and 30 days before the end of each quarter.
54% of investors have invested in a fund which gated assets. A gate provision is a very common restriction placed on a hedge fund limiting the amount of withdrawals from the fund during a redemption period. 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, says Preqin.
“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,” commented Amy Bensted, manager at Preqin, a global alternative assets industry's source of data and intelligence. “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. Ultimately, however, managers that understand the needs of investors and adapt their products accordingly will be the most successful in attracting institutional capital. ”