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Liquidity Drives Institutional Inflows Into Hedge Funds.

by Graeme Terry

  • 26 Sep 2011
  • HF

Liquidity has become an increasingly important issue for investors in hedge funds over the last few years following the financial crisis. As allocations to hedge funds have continued to grow there has been a marked increase in demand for liquidity and transparency amongst institutional investors. Liquidity is particularly important as it enables investors to exit positions at their own discretion meaning they can close positions in underperforming hedge funds.

A recent Preqin study has shown that three quarters of investors look for greater-liquidity in their hedge fund portfolios following the financial crisis in 2008 suggesting that the market turmoil has had a major effect on investor attitudes. As a result of the growing importance of liquidity, many investors now prefer shorter lock-up periods or reject these all together. The research shows that 30% of investors that participated in the study are not prepared to consider a lock-up of any length. Only 6% of investors surveyed said they would be prepared to accept a lock-up of more than 2 years. Monthly and quarterly redemptions are popular amongst investors with 46% and 32% respectively stating a preference for such liquidity provisions.

Due to the more challenging fundraising environment, investors now have the power to negotiate more favourable terms from their managers. The research demonstrated that reduced fees are the most common preference amongst investors in negotiations and 42% of investors said they would be prepared to accept longer lock-ups in return for lower management fees. Despite this liquidity is the greatest concern for many investors and 34% of investors that took part in the study said this would take precedence over any other terms.

This study has highlighted the growing importance of liquidity amongst hedge fund investors and how their demands have changed over the past few years.  This demand for greater liquidity is also driving growth of specialised structures such as managed accounts and UCITS funds as investors seek to invest in more liquid alternatives to the traditional commingled fund model. As a result managers that understand the liquidity needs of their investors are those likely to be most successful in attracting new investment over the next few years.

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