Shannon Hawthorne

20/04/2011 Author: Shannon Hawthorne

Lock-ups risk throwing away key to investment

Once bitten, twice shy. Investors who attempted to withdraw capital from their respective hedge fund managers at the peak of the financial crisis, only to find that they were not able to do so, have understandably become zealously anti-gates and lock-ups.

While today, according to fund brokers Tullett Prebon, only 3% of industry assets are locked-up, at the height of the crisis, this figure stood at 35%, so it’s perhaps unsurprising that a recent Goldman Sachs survey has revealed that, in 2011, 90% of assets will be allocated to firms with lock-up periods of under a year.

In fact, a spokesperson from the California Public Employees' Retirement System (CalPERS), which, at $227.9bn, remains the largest public pension fund in the US, recently revealed to HFMWeek that the fund’s Risk Managed Absolute Returns Strategies (RMARS) team is working with a number of its hedge fund managers on establishing ‘no lock-up arrangements’.

“In many instances, we have implemented arrangements where we get reduced fee structures for a longer investment period that reverts to a higher rate – in some cases, full fees – if we terminate a manager earlier than envisioned,” the spokesperson added.

The retirement system currently includes hedge funds as part of its global equity portfolio, which has a “discretionary ceiling” of 8%, meaning that CalPERS could, in theory at least, allocate an additional $4bn to hedge funds.

Investors may be on their way to forgiving, but they certainly haven’t forgotten the events of 2008, and for funds looking to gain access to big-ticket investors like CalPERS, it’s a lesson well worth remembering.

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