Booming retail-focused hedge funds raise red flags
By Nishant Kumar
MONACO (Reuters) - A flood of money chasing cheaper and more retail investor-friendly hedge fund strategies could reverse if poor market liquidity ends up hitting returns, attendees at a hedge funds conference said on Tuesday.
Discussing the so called "liquid alternatives" sector during the GAIM hedge fund conference in Monaco, panelists said there may be a gap between investor expectations and what these funds can deliver.
Unlike traditional hedge funds, which can require investors to lock their cash up for a month or more, liquid alternative funds allow investors to move cash in and out on a daily basis.
They are also less expensive and have a lower minimum investment level, qualities that have appealed to retail investors keen to tap alternative parts of the market in the hunt for better returns than those offered in stock and bond markets.
While that has helped industry assets grow 40 percent annually since the financial crisis to more than $600 billion, according to Deutsche Bank research, it has also brought the attention of regulators concerned about how some of them are constructed.
"There has been concern raised recently that maybe some of these funds will struggle if there was a liquidity crisis. Certainly regulators are focussed on that aspects of liquid alternatives at the moment," said Paul Graham, chief executive of Henderson Alternative Investment Advisors that manages about $7.5 billion (4.75 billion pounds) in liquid alternatives.
Any blow-up could damage the future prospects of the booming industry and potentially subject it to tighter regulation as seen after the 2008 crisis.
"There’s massive inflow of money because investors are scared ... and they think these things are all going to protect against rising rates," said Jason Schwarz, president of Wilshire Funds Management.
This puts "a burden on the asset management community to make sure that the industry overall has properly articulated in setting expectations on what these products are," he added.
Among the strategies that could face a problem with market liquidity are those betting on high yield bonds, emerging market debt or mid-cap and small-cap stocks, the panel said.
And since the growth has been explosive, at least for some funds, many may not have upgraded their trading and operational infrastructure to match the complex liquidity requirements of some strategies, panelists warned.
"There will be accidents," said Chris Jones, head of alternatives at BFinance, referring to potential risks as a result of many funds pushing into less liquid investments.
(Editing by Jeremy Gaunt)
