Liquidity in hedge funds has been an issue of importance for both investors and fund managers following the credit crisis in 2008. Preqin recently conducted detailed interviews with more than 50 leading institutional investors in hedge funds in order to find out more about their current views on the issue of liquidity. A number of investors are continuing to seek additional liquidity in their hedge fund portfolios, with 39% of those surveyed indicating they are looking for more liquid funds than they were three years ago. Whilst this is not as dramatic as the 75% that indicated this in a similar study last year, it still suggests that a number of investors have been taking steps to improve liquidity in recent years and are continuing to do so.
The Preqin study showed that the majority of investors look for at least quarterly liquidity, with only 5% and 7% of investors accepting semi-annual and annual liquidity respectively, a reduction from 8% and 9% in 2011. The greater liquidity requirement is also highlighted by a major increase in the proportion of investors targeting weekly and daily liquidity over the past year, up to 23% and 20% respectively compared with 7% and 3% in 2011.
The most commonly cited reason for investors targeting additional liquidity was in order to allow investors to rebalance their portfolios quickly, with 49% of investors surveyed indicating this. This is important to investors as it means they can change their portfolio if a manager is underperforming, and it also allows them to take advantage of new opportunities. Other common reasons for investors targeting additional liquidity include allowing more frequent access to capital, an ability to react to changes in market conditions and to provide a degree of liquidity in their overall alternative assets portfolio, while some investors prefer not to be exposed to illiquid strategies in general.
Despite an overall desire for more liquidity, 43% of investors indicated that they would accept longer lock-ups for a reduction in fees, and 28% of respondents indicated that they would accept less liquidity in exchange for higher returns. 50% of investors said they would not consider accepting longer lock-ups, with a number of investors stating that liquidity is more important than a small saving on fees, while others prefer to consider the strategy of the fund rather than the specific terms offered. In terms of strategies, the majority of investors are typically willing to accept longer lock-ups for event driven strategies (particular distressed hedge funds) while expecting shorter lock-ups for long/short strategies.
The issue of liquidity is likely to remain a key topic of discussion for a significant number of hedge fund investors and fund managers over the coming 12 months. Managers must take into account the demands of investors and those offering illiquid funds need to ensure that this is coupled with an attractive fee structure and strong performance.