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In a survey last month of institutional investors by data provider Preqin, 12 per cent of respondents said that during this period of volatility they were exclusively looking at liquid investment strategies in their hedge fund portfolios, while 30 per cent would not consider funds that have a lock-up period. Olivier Cassin, head of research and development at investment consultant company bfinance, said: “When there’s uncertainty in the market and heavy government intervention on monetary and fiscal policy, for most of our clients, access to capital outweighs the illiquidity premium that comes from locking up capital. Right now investors desire liquidity far more than the opportunity cost of potentially missing out on a few percentage points of performance.”
With assets in the roughly $2 trillion hedge fund industry reaching new highs, the composition of the investor base has changed significantly since the financial crisis. Preqin estimates that 61 per cent of hedge fund capital comes from institutional investors, compared with 45 per cent before the crisis. According to Robert Howie, head of alternative investment at consultant Mercer, this is unsurprising. He said: “I can see why there is a focus on liquidity. During the crisis, clauses were suddenly invoked that were very vague and many investors found themselves dealing with gates, side-pockets and suspended redemptions.” Howie said that investors should look to see that the fund’s liquidity matches its underlying instruments. He said: “Moreover, liquidity is not something that is constant. Investors need to understand what managers will do if their instruments and markets become illiquid.”
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