Some hedge funds are persuading investors to lock up their money longer and giving back lower fees in return.
Managers use the longer term—double or more than the customary one-year hold—to buy less easily tradable but potentially more profitable assets.
“As we move further and further from 2008, people are getting more comfortable,” Spiros Maliagros, president of the $3 billion hedge-fund firm TIG Advisors LLC, told the Wall Street Journal in November.
But some financial advisors say their clients are not so easily persuaded. Bob Confessore, a certified financial planner and president of The Hartshorne Group in Red Bank, N.J., said he has had clients dump hedge funds in recent years—not just because of performance during and after the financial crisis, but because they did not provide enough liquidity.
“Lack of liquidity frightens people,” Confessore said. “Clients have railed at the fact that it sometimes took months for them to get their money after they put in a request to redeem.”
The current volatile environment makes liquidity a crucial consideration, he said. The flow of assets into exchange-traded funds is evidence that investors value liquidity, he said. The Hartshorne Group has $310 million assets under management. Confessore is also a shareholder and vice president of WBI Investments, where Hartshorne has $260 million invested. WBI manages $3.3 billion overall.
There is still an argument for hedge funds to be a part of an investment portfolio, said Evan Welch, chief investment officer for Antaeus Wealth Advisors in Boxborough, Mass., even though ETFs and alternative funds that ape hedge-fund strategies provide increasing competition for hedge funds.
If an investor or institution values a hedge fund manager’s expertise, it is worth it, Welch said. But he recommends that investors do their due diligence about the fund. An issue to look at is how much money the fund has, he said. Some funds outgrow the ability of one person to effectively manage the assets. Another issue to examine with popular hedge fund managers who have had recent success is whether they are hands-on managers for the fund being considered, Welch added.
Antaeus has $350 million assets under management. Welch said he often likes to put his clients into fund of funds vehicles to diversify the hedge-fund risk.