What Are the Most Liquid Hedge Fund Strategies?

by Ross Ford

  • 02 Nov 2012
  • HF

During times of economic uncertainty investors are increasingly looking for investments that offer greater liquidity.  Hedge funds can provide this liquidity, with investors being able to access their capital, on average, every 1.4 months with 34 days notice and a 6 month initial lock-up period. However, does this hold true for all strategies within the hedge fund industry?

Investors in macro funds receive the greatest access to their capital. Macro funds offer their investors access to their capital, on average, every 26 days with a notice period of 23 days. Macro strategy funds also have the lowest initial lock-up period of any hedge fund strategy of 3 months. CTAs contribute to the low liquidity terms offered by macro strategy hedge funds because they offer their investors a median redemption notice period of 6 days with no initial lock-up period.

Event driven strategies are the most illiquid. On average, investors in event driven strategy funds are offered liquidity terms of 2.66 months redemption frequency with 60 days redemption notice. Event driven funds traditionally make longer term investments and this somewhat explains why the mean lock-up period for the strategy is 10.45 months, the highest lock-up by some margin, and their median lock-up period is even higher, standing at 12 months. Within the event driven sector, distressed strategy hedge funds, with their focus on long-term investing, have the longest initial lock-up period of any strategy of almost 15 months.

Hedge funds that use either a long/short, relative value or multi-strategy offer their investors liquidity terms that are in line with the industry mean, offering a redemption frequency of 1.4 months, 1.1 months and 1.6 months respectively, with a mean notice period of 29 days (long/short), 35 days (relative value) and 43 days (multi-strategy).

Compared to private equity, hedge funds can offer investors access to more liquid alternative assets investments. The most liquid strategies are in the macro sector while event driven are the most illiquid. Institutional investors have been diversifying their portfolios over recent years to gain access to funds with different investment horizons and liquidity characteristics. By carefully creating portfolios of funds with such variety investors are able to better weather any future liquidity crises which may occur.

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