There has been a 7.4% increase in investors in distressed securities funds throughout the second half of 2010 and early 2011, making it one of the faster growing strategies in terms of institutional mandates over the period. 14.4% of investors now have commitments to such funds, and althoughe not as popular as some strategies, such as long/ short equity and global macro, distressed securities is becoming a strategy in vogue.
The underlying assets of distressed funds often have long term investment horizons and consequently, these hedge funds have the longest average lock-up period of all funds. The average lock-up period is 20 months, and investors willing to commit to such strategies must be prepared for the illiquidity of investing in distressed funds.
There is much variation between investors in terms of their appetite for distressed funds. Just 4% of private sector pension funds invest in distressed securities hedge funds, compared to 12.8% of public sector pension funds. Private pension funds, in general, have greater liquidity requirements from their hedge fund portfolios and are on average prepared to accept a maximum lock-up period of 13.9 months, lower than the 20 months average lock-up restriction that distressed securities funds have. In contrast, public sector pension funds will, on average, accept lock-up periods of 21.3 months, and are therefore can have holdings in distressed hedge funds.
Funds of hedge funds continue to be the leading providers of capital for distressed hedge funds, accounting for 41% of the total investors in such vehicles. In North America and the Rest of World, funds of hedge funds represent around one third of all institutional investors active in distressed hedge funds. This rises to 38.9% in Asia, and 59.8% in Europe. Throughout the rest of 2011, funds of hedge funds will continue to be active investors distressed securities hedge funds, particularly in Europe. Jersey-based Ermitage Group and Swiss fund of hedge funds Gottex are both seeking to add distressed securities managers to their portfolios in the coming months. The strategy is also popular with sovereign wealth funds, with 16.7% of these institutions investing in distressed hedge funds. In North America, endowment plans represent 25.6% of institutional investors in distressed securities hedge funds; endowments are also prepared to accept the second longest lock-up period of all investors, at 26.1 months. The strategy is also appealing to other groups of investor, for instance the California-based Henry J. Kaiser Foundation is set to make its first allocation to the strategy this year.