GLOBAL – Institutional investors may have no option but to sacrifice returns if they continue targeting higher liquidity when investing in hedge funds, according to a study by Preqin.
The company pointed out that liquidity had been of increasing importance in the wake of the 2008 credit crisis, but warned that many investors who target more liquid hedge fund investments might be sacrificing greater returns in the process.
The study showed that long/short funds with quarterly redemptions generated a cumulative return of 58% since 2007.
By comparison, daily redemption and weekly redemption long/short funds, which give investors more access to their capital, posted returns of 28% and 36%, respectively, over the same period.
Preqin stressed that hedge funds with lower liquidity provisions had shown more volatility of returns and larger drawdowns in crisis periods.
Its survey also showed that the proportion of investors looking for liquidity was decreasing, with 39% of respondents looking for more liquidity in their hedge fund portfolios than in the past, compared with 75% in 2011.
Amy Bensted, Preqin's head of hedge fund products, said: "This may be because institutions have adjusted their portfolios over the past four years and have reached a satisfactory level of liquidity, or because stronger performance of more illiquid funds has proved appealing to some groups.
"Notably, those investors with long-term investment horizons are even willing to accept funds with longer lock-ups than last year."
In total, 79% of respondents said they would accept longer lock-ups for funds with an event-driven strategy.
The data firm added that investors were likely to be willing to accept longer lock-ups for illiquid strategies where funds were specifically targeting illiquid assets.
Bensted said liquidity nonetheless remained an issue for many investors, with 31% of respondents seeking more liquidity from hedge funds in 2013.