From April 1 through June 9, 2009, BHA collected 135 mandates for funds of hedge funds. Remarkably, that is the same number we collected this year during the same time frame. Although the number of mandates have stayed the same, investors’ preferences have not.
The most significant change from this time last year is the increased demand for liquidity. Additionally, many investors are avoiding lock-ups. The pain of the financial crises is still being felt by many investors. Although the market has improved, they are reluctant to go back to the old ways. Needless to say, funds that don’t have at least quarterly redemption periods and rigidly impose hard lock-ups are finding themselves out of the running with an overwhelming majority of investors.
Perhaps most interesting, though, is a shift in investor preference for smaller funds. Last year, the majority of investors BHA spoke with required funds of hedge funds to have $200 million to $500 million in assets. This year, many investors are evaluating funds of funds with as little as $75 million to $100 million under management.
A wealth advisory firm in Geneva is an example of an investor that has changed its assets-under-management requirements. The firm recently began searching for a specialized fund of funds that invests only in long/short equity funds. It wanted funds that offer superior liquidity, however, it specifically requested that funds have only $100 million in assets. Prior to this, the firm required funds of hedge funds have a greater amount of assets under management in order to be seriously considered.
As the graphs below show, during the past year investors have become increasingly comfortable with smaller funds. In 2009, only 35 percent of investors with active mandates for funds of funds indicated a comfort level with less than $200 million in assets; that number has jumped to 48 percent in 2010.
Throughout the rest of the summer, BHA analysts will continue to monitor the trend to see if investors continue to be comfortable investing in smaller funds.
