Hedge funds keep gates firmly locked despite record gains
The best first-half performance by hedge funds for a decade may have bolstered the confidence of managers, but their refusal to relax the various forms of restrictions imposed on redemptions last year is angering investors.
About $130bn (€91bn), or about 10% of all assets in hedge funds, still cannot be withdrawn, nine months after managers began to lock investors in as redemption requests grew. The proportion of assets gated is only marginally smaller than the 11.6% barred from withdrawal at the start of this year, according to research by index provider Credit Suisse/Tremont.
One fund of funds manager unable to retrieve 20% of his assets said: “It is not their money to gate, they have to pay it back.” Investors pulled $43bn from the industry during the second quarter of this year, said analysts Hedge Fund Research, even though funds made 9.1%.
Sheldon Macdonald, senior investment analyst at investor Nedgroup Investments, said some managers barred withdrawals opportunistically last year because they were doing badly, not due to illiquid markets. If their mediocre performance persisted into this year, he said, recent good returns that lend a semblance of “business as usual” to the industry may be coming from the ungated funds.
He said equity hedge funds relaxed curbs earliest “but for strategies like asset-backed lending, which was at the epicentre of illiquidity problems last year, you could be looking at years.”
Managers back on normal business terms within 12 months “may still find there is some appetite for their funds afterwards”, Macdonald said, “but those restricting redemptions for longer will have to consider switching to a private equity structure to keep investors interested.”
He added that investors were not just focused on when gates would be lifted. He said: “It’s also about managers being credible generally, and about how you have treated your investors – how accurate you have been in saying when you will return money to those investors.”
Max Schmid, managing director at asset manager Fortune, said the slender improvement in redemption terms did not surprise him. He said: “Liquidity is coming back to markets sporadically, and only to some market segments and asset classes. A whole swathe of fixed-income and credit-related strategies are still illiquid. Special situations funds are now nothing but private equity in disguise.”
He said fast-trading computers provided the illusion of liquidity in equity markets, but the machines largely traded with one another, rather than providing lasting liquidity for other market participants. He said: “Algorithmic traders are providing volume but not liquidity to the broader market. They’re just chasing each other’s tails.”
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