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Benedicte Gravrand, Opalesque Geneva:

Raimond Schuster, CEO of ISP Securities, an independent global financial services firm with CHF1.5bn in AuM ($1.6bn) and offices in Zurich and in Israel, believes the current discussion on liquidity is changing the environment for hedge funds. He explained why at Terrapinn’s Hedge Funds World conference in Zurich in November 2012.

Liquidity correlation

ISP Group has invested in hedge funds since 1994, and has managed its own fund of hedge funds (FoHF) since 1997. The old school approach of managing liquidity in a FoHF portfolio involved spreadsheet listings, which estimated how much of the portfolio was in liquid assets, Schuster started. But this did not necessarily show the real picture.

According to Schuster, a traditional hedge fund portfolio consists of liquid and transparent strategies that take directional bets in listed instruments, and of illiquid strategies that employ the liquidity facilities of financial intermediaries. But late 2008 showed that the illiquid strategies were too dependent on the interbank liquidity, as when those dried up, the illiquid strategies suffered from heavy drawdown or became illiquid (or both).

"One can even ask whether a 1:1 liquidity correlation is enough," he noted.

After that, investors who needed liquidity redeemed from their funds, and found that......................

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