Hedge fund and fund of fund managers regularly “explain” to me that their investors understand that they are making a long term investment and hence aren’t that concerned about short-term liquidity.
Odd then that the FT had this report
Funds of hedge funds selling adds to volatility
Mon, 03 Sep 2007, 21:33
Deleveraging by funds of hedge funds as they faced redemptions from investors may have contributed significantly to the stock market turmoil in the summer, according to research by BarclayHedge and TrimTabs. Their data suggest that investors in funds of hedge funds, the most popular vehicles for investing in alternative assets, may have redeemed as much as USD55bn in July, equivalent to almost 5 per cent of their assets.
Some of those redemptions may have been covered by inflows (new investment) or by cash on hand, but a significant chunk will have had to flow through to underlying funds. Given that notice periods on funds tends to be linked to the types of instruments they use and their liquidity, you’ll often find that funds that operate using equities or futures offer the shortest notice periods. Hence, redemptions may have been covered by withdrawals from funds that may have been least affected by credit crunch.
Being 5% of assets this won’t materially hit the skew of the fund of fund portfolios but chances are some fund of funds will already be planning for further withdrawals and thus kicking of the process of giving notice on some of their more illiquid fund holdings – which in itself puts even more pressure on the underlying funds.