Survey: Hedge Funds With Minimal Lockup Periods Woo Investors

(April 14, 2011) — Investors are seeking hedge funds for their relatively short lockup periods, a new survey by Goldman Sachs reveals.

The study — conducted in late January and titled the Goldman Sachs Prime Brokerage Eleventh Annual Global Hedge Fund Investor Survey 2011 — notes that hedge fund customers plan to allocate 90% of new investments in 2011 to firms that agree not to tie up money for more than one year.

“Plan sponsors have struggled with the funded status of plans,” Jon Waite, director of investment management advice and chief actuary at SEI Institutional Group, tells aiCIO. As a result, funds are looking for ways to diversify away volatility, adding assets that have a low correlation to other assets in their portfolio, and seeking alternative asset classes. “Hedge funds are seeing more interest from institutional organizations — particularly pensions — that can’t have long-term lockups, investing too heavily in private equity for example,” Waite says, noting that foundations and endowments, which have longer-term time horizons, are less worried about long-term lockup periods.

Undoubtedly, hedge funds have become more attractive to pensions in recent years. A recent white paper released by Infovest21 showed that pensions will increase their direct allocations to hedge funds in 2011. “Institutionalization, regulation and the challenging asset raising environment are some of the major forces continuing to affect hedge funds and funds of funds in the current environment,” the study noted.

“The top factor driving hedge fund investments is the search for diversification in portfolios in the institutional space,” Waite tells aiCIO, describing the intense volatility of the past several years. “Efforts by pensions to avoid volatility, as well as a general growing acceptance of alternatives has fueled the trend toward hedge funds,” he says.

Furthermore, according to Waite, the attention on Bernie Madoff’s ponzi scheme has contributed to a more skeptical and discerning approach toward hedge funds by institutional investors. “Investors all saw the Madoff headlines over the last couple of years, and they’re onto the fact that they need to understand what these funds are.” While hedge funds have historically been black boxes, with very little transparency, investors are increasingly demanding more clarity, Waite says.

Recent findings by Moody’s Investor Services and Preqin confirm the trend toward hedge funds. A report released by Moody’s last month showed that hedge fund managers will be forced to reduce their fees and risk tolerance while altering their business strategies as pensions increase their allocation to the sector. An earlier report by Preqin revealed that the hedge fund industry is gaining traction. Despite negative returns over a three-year timeframe, public pensions have increased their allocations to hedge funds. Nearly 300 public pension plans worldwide now invest in the asset class, a 51% increase over the past four years. Preqin’s database of institutional investors showed that 295 government pension funds worldwide were invested in hedge funds in the first quarter 2011, compared to 196 plans as of December 31, 2007. Additionally, the research indicated that another 49 public plans are seeking to make their first hedge fund allocation within the next year.

Hedge funds have become more popular among public pensions than private equity, according to Preqin’s report. In total, the amount of public pension assets currently invested in hedge funds is $127.3 billion.