A Shift to Hedge Funds
A lack of liquidity has been a major issue for both fund managers and alternative fund investors during 2008 and 2009. Before the financial crisis, many investors overcommitted to funds that were extremely illiquid. As investors look to rebalance their portfolios and begin to re-allocate capital, many are looking at hedge funds that trade liquid assets and provide frequent redemption opportunities. Because many funds temporarily blocked redemption requests, investors today are looking for funds that not only offer frequent liquidity opportunities but also make explicit promises to not impose gates on future redemptions.
For example, endowments, which were hit hard by illiquidity problems, have increased their allocation pools. Many have large portions of their portfolios invested in hedge funds because of their liquid nature.
Similarly, advisory firms are taking a different path. The investment committee of a consulting firm based in Florida met recently regarding the liquidity of clients’ investment portfolios. In 2008, the firm had a large number of clients invested in the real estate sector, which performed very poorly. Now that the firm is beginning to see capital inflows from real estate fund redemptions, it has decided to change direction and is placing that capital with hedge funds. The firm has decided that managed futures and other short-term trading funds, which are highly liquid, are the best places for its clients’ capital.
BHA continues to see many investors move into liquid vehicles and predicts that even more will make the shift from private equity and real estate funds to liquid hedge funds. The unpredictability of the market during the past year is causing many investors to take a new direction.