Managers seek new ways to manage fund liquidity for investors
Fund managers and service providers say that top of their ‘must do’ list is satisfying investors’ needs for liquidity.
Since the 2008 credit crisis, hedge managers have moved quickly to align their fund redemption terms with liquidity of underlying markets.
As the next crisis evolves, they are acting again, including installing redemption mechanisms allowing them to treat all investors equally if markets simply evaporate.
Simon Thomas, partner with lawyers Akin Gump, says investors’ primary focus regarding fund liquidity has been on matching fund redemption with market liquidity – “in keeping with the modern times, and various regulatory concerns from groups such as IOSCO, which have published papers on liquidity”.
A manager would have to provide “a good underlying reason” why he should have any mismatch, Thomas says.
“For funds trading large caps, or futures, or something else very liquid, you would now have to question why a 60-day notice period would be preferable.”
Some managers are moving offshore products, with less regular dealing, to onshore structures such as Ucits.
Jupiter said investor demand for more liquidity was one reason it moved its Cayman-domiciled Europa equities hedge fund to a parallel Luxembourg Sicav with a six-day dealing cycle.
Ucits funds must allow redemptions at least fortnightly, and many do even better. Marcus Storr, head of hedge funds at Feri Trust, noted Ucits funds can include provisions to limit partial redemption payouts, which may reduce the attractiveness of Ucits’ frequent dealing terms.
But Akin Gump’s Thomas says he doubts a Ucits manager would readily lock down investors’ money, “and the regulator would be notified if you were stopping redemptions, because it is a retail product”.
Managed accounts are another way to improve terms. The investor, not the manager, owns the account, and assets sit in their name, not a fund’s. They are sold by the manager/adviser at the investor’s direct request.
Thomas says most funds running over $1bn would now have managed accounts of some kind.
“But you have to put an awful lot of effort into a managed account, and if you’re a fund manager running $5bn, the effort to set up an account for someone investing $100m may not be worth it. If you have under $1bn AuM, though, it may be worth doing it for $50m or $75m.”
Even the most favourable dealing periods help little if underlying markets dry up. Thomas says at the height of the last crisis, “there was no market for previously liquid assets, so notice periods did not really make any difference. You could not sell the assets down anyway”. He cites pre-IPO stocks and small caps as examples.
The problem with NAV
A manager might receive a redemption request, but find the NAV they could strike for their fund on that day “bore no resemblance to what was received 30 to 45 days later [so] the investor was expecting to get back 100, but only got 50. The whole concept of ‘redeeming at NAV’ can be quite problematic.”
To help both parties in such difficult situations, Akin Gump is helping managers provide ‘slow-pay mechanisms’.
Under these, investors filing withdrawal requests agree to receive a payout in line with what the market offers as the payout is made.
“This may be 110, or may be 90, but either way you are not getting the NAV as at the first filing date,” Thomas explains.
The investor has their portion of fund assets put into a liquidating class and managed down over time, in line with the other fund assets and redemption terms. This means the manager is not destroying the value of other investors’ holdings.
“It works well for credit and EM funds, and for equity funds, and tries to deal with the problem of being unable to ascertain the value of an asset as at the date of redemption,” Thomas explains.
“If the investment goes up during the time between filing and payout you get more than you were planning.”
“With the new concept, the liquidity is being managed alongside the portfolio, so the decision is taken for the whole fund. It is a mechanism for the manager to work within the confines of the fund, rather than having to cobble something together after the event.”
Some instruments however, are difficult to split up, for example if a redemption request necessitates a sale to raise cash to pay out the redeemer, or requires an in-kind payment.