Managed Futures/CTAs Viewed as Most Liquid Hedge Fund Strategy, Preqin Says

(December 17, 2012) — Hedge fund investors targeting a higher degree of liquidity could be sacrificing greater returns, research firm Preqin has found.

According to Preqin’s study, managed futures/Commodity Trading Advisor (CTA) funds, which commonly advise investors on the use of future contracts, are viewed as the most liquid hedge fund strategy, with event-driven (and in particular distressed) funds exhibiting the least liquid characteristics.

While liquidity is still important to investors, the proportion that appear dissatisfied with the liquidity profile of their hedge fund portfolios seems to be declining: 39% now state that they look for more liquidity in their hedge fund portfolios than in the past, compared to 75% that stated the same in 2011.

“Hedge fund investor appetite for liquidity has decreased since last year,” Amy Bensted, Preqin’s head of hedge fund products, said in a statement. “This may be because institutions have adjusted their portfolios over the past four years and have reached a satisfactory level of liquidity, or because stronger performance of more illiquid funds has proved appealing to some groups. Notably, those investors with long-term investment horizons such as endowments, foundations, and family offices are even willing to accept funds with longer lockups than last year. Despite this, liquidity remains an issue for many investors, with 31% of investors seeking more liquidity from hedge funds in 2013.”

The study showed that 28% of investors surveyed indicated they would accept less liquidity in exchange for higher returns. A total of 79% of investors interviewed stated they would accept longer lockups for funds with an event driven strategy.

In November, another study by Preqin highlighted investor demand for liquidity, showing that institutional investors active in CTA funds have more than doubled since 2008. “CTA/managed futures have often been regarded as an ‘all-weather’ investment choice, with historical performance characteristics that make the strategy highly relevant during periods of relatively low returns and generally rising asset class correlations,” Preqin’s Bensted said at the time. “Year on year, more investors are adding CTAs to their portfolios of alternative asset funds in order to tap into this diversified liquid source of alpha. Correspondingly, more managed futures vehicles are being launched in order to cater to the growing interest in the strategy. Despite recent disappointing performance by CTA vehicles, investor interest in the strategy continues unabated with 14% of fund searches initiated in October 2012 including a managed future mandate.”

The uptick in CTA popularity among institutional investors jibes with comments made by Agecroft Partners’ Don Steinbrugge, who has noted that the number of pension plans allocating to hedge funds has increased over the past decade, along with the percent of their average portfolio allocation. CTAs have only recently been accepted as a core hedge fund allocation among schemes to lower volatility, he said. While he found Preqin’s expectations about CTA popularity “a little high,” he noted that more assets have gone to CTAs than any other hedge fund strategies since 2008. According to Steinbrugge, over $300 billion, or 15% of the hedge fund market, has been allocated to CTAs. “Public pensions like CTAs because they’re not correlated with other asset classes, and also because of their transparency and liquidity.”