Institutional investors around the world are pushing back against a hedge fund practice that isolates up to 10% of an investor’s assets, according to a survey.
Credit Suisse’s Annual Hedge Fund Investor Survey, representing a combined US$1 trillion of funds under management, finds that institutional investors are challenging hedge fund managers over redemption fees and side pocketing of assets, which leaves assets isolated from pricing and from forced sale.
According to Credit Suisse, some investors were angered when their assets were side pocketed during the financial crisis, rendering them temporarily out of reach when investors were seeking liquidity.
Edgar Senior, managing director and head of capital services with Credit Suisse in London, U.K., says almost half (45%) of respondents have specifically discussed the halting of obligatory side pocketing of assets in favour of optional side pocketing.
The latter would give investors a choice between investing in a share class that may be subject to side pocketing or in one where assets would not be pocketed. Investors also have the option to make decisions on side pocketing on a trade-by-trade basis.
In the volatile environment of late 2008/2009, side pocketing by hedge funds make it almost impossible for pension funds administrators to redeem the full value of their assets. In some cases, as much as 10% was frozen and out of reach.
The study also found that institutional investors are now pushing for improvements in the speed at which they can withdraw money relative to the liquidity of the underlying markets. Forty-three percent of respondents have demanded more frequent access to their money and 39% have asked for the removal of hard lock-ups for new investors.
Further, only 25% of investors are open to investing with a 90-day redemption notice period for higher liquidity strategies, while 72% are comfortable with 90-day notice for lower liquidity funds.
The survey also found that the hedge fund industry is expected to hold US$2 trillion by year’s end, up 20% from the start of 2010 Respondents said they plan to increase their existing hedge fund investments by an average of 9% (US$148 billion) across the industry, with the remaining 11% coming from investment gains.