Getting Money Out of Hedge Funds

Why do hedge fund managers "gate" their investors?

One of the biggest frustrations I’ve had over the past few years is hedge fund managers “gating” their investors.  High-net-worth (HNW) investors commit substantial personal capital to these hedge funds with the expectation that the manager will limit the downside and generate greater returns than your typical index-chasing portfolio. 

Unfortunately, during the downturn, not only did they suffer losses, but they went so far as to lock-up the investors’ assets within the funds.  Investors were unable to access their money for an indefinite period of time regardless of circumstances. 

To me this is inexcusable; while I understand investments in private equity and other illiquid strategies have longer-term commitments, it is unconscionable to think a long-short domestic manager should and/or would tie up their investors’ assets.  For this reason, I encourage investors to avoid limited partnerships with gating provisions in place. 

Some good has actually come out of the publicity on gating. The industry has seen the expansion of publicly-traded alternative (hedge fund) mutual funds.  As a portfolio manager of an alternative mutual fund, I am far from impartial, but recently a number of well-respected hedge fund managers have decided to offer their strategies in this liquid, transparent format with daily pricing. 

I would encourage all HNW investors to consider adding exposure to alternatives—but first look at the alternatives offered in a mutual fund format.  Typically, adding a hedged strategy would decrease a portfolio’s overall correlation to the markets and would therefore lower the portfolio’s risk profile and corresponding volatility.  

I would strongly encourage investors to focus on risk-adjusted returns. A tactically-managed hedged strategy may offer the added benefit of providing an asymmetric risk/reward profile. If the hedged strategy is available in a mutual fund format then the risk-adjusted return profile gets even more attractive given the importance of liquidity in calculating risk-adjusted returns.

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