Preqin: Liquidity Tops Concerns Among Institutional Hedge Fund Investors

(September 13, 2011) — A recent study by Preqin shows that liquidity is a leading concern among institutional hedge fund investors. 

Preqin’s research revealed that 75% of investors are looking for greater liquidity in their hedge fund investments following the financial crisis.

According to the study by the alternative asset analyst, funds with lock-up periods are currently considered less favorable among investors. “The majority of investors have increased their liquidity requirements following the market downturn and the demand for funds with shorter lock-up periods and greater flexibility in terms of redemptions has grown in the years since 2008,” Amy Bensted, Manager of Hedge Fund Data at Preqin, said in a statement. “Those funds that have adopted better liquidity terms for their investors have been more successful in gaining institutional capital, while demand for increased liquidity is also driving the growth of specialist structures…”

Specifically, Preqin’s study revealed that only 6% of respondents will invest in a vehicle with a lock-up period of over 24 months. A total of 46% of investors preferred quarterly redemptions, while 32% seek access to funds with monthly redemptions. Meanwhile, 42% would be willing to accept longer lock-ups in return for lower management fees, while 38% felt the same about performance fees.

Bensted added: “Investors are demonstrating flexibility, with a significant number willing to compromise their liquidity demands in return for more favorable fund terms elsewhere. Ultimately, however, managers that understand the needs of investors and adapt their products accordingly will be the most successful in attracting institutional capital.”

A study early last year by SEI and Greenwich Associates highlighted similar concerns among investors. Transparency and liquidity risk overtook poor performance as the top concerns for institutional investors investing in hedge funds, the study noted.  

The survey, titled “The Era of the Investor: New Rules of Institutional Hedge Fund Investing,” revealed that diversification remained the primary reason to invest in hedge funds. The survey showed nearly all of the institutional investors who responded said they would either increase or maintain hedge fund allocations over the rest of 2010. Additionally, transparency rose in importance, with more than 70% of respondents saying they request “more detailed information from managers than they did a year ago.”

“Investors remain committed to hedge funds but that commitment comes with increased expectations,” said Phil Masterson, Managing Director for SEI’s Investment Manager Services division in a news release in January 2010. “The balance of power has clearly shifted and managers must meet the growing demand for transparency and increase their focus on operational effectiveness if they want to be successful in this ‘Era of the Investor.'”