Financial advisers should not hold back from investing client funds in hedge funds but are cautioned to examine the blend of liquid and illiquid assets within the funds chosen, according to a US hedge fund manager.
Permal Group senior vice president and investment strategist, Timothy Schuler, said the global financial crisis (GFC) was hard on hedge funds and their managers but those that have survived over the past few years have learnt important lessons.
“The GFC reinforced the notion that hedge funds should be in the more liquid end of the spectrum and there was no need to bias a hedge fund towards illiquid assets,” Shuler said.
“The supposed liquidity many funds boasted was not there when need in many strategies. Managers were moving from liquid assets to illiquid assets which in turn created more leverage and opened the gap between the liquid and illiquid assets.”
Schuler said Permal had envisaged a move to more illiquid assets would create problems and had retained strong liquid positions prior to 2008 and was better positioned when the GFC hit to remain in the market.
“As a result of staying in liquid assets we had some dry powder in store and were able to buy cheap assets as we were able to put that liquidity to work at a time when few others could do so,” Schuler said.
“A measure of how well this worked was that we were able to return to our high water mark within 18 months while it took the wider market three years to do the same.”
However, Schuler said advisers should not be afraid of illiquid assets but rather ensure the hedge fund’s approach was consistent over time and was also a close match for the needs of individual investors.
“I am not saying opportunities in illiquid assets are bad as there are some very good opportunities out there but advisers have to ensure the redemption policy around those assets and opportunities are in line with what investors want and need,” Schuler said.
