Hedge fund terms: Dealing with the prisoner’s dilemma
The current market is testing relations between managers and investors to the full, says Neil Wilson.
Wasn’t it easier in the old days? Perhaps the memory plays tricks – and hedge funds were always this complicated. But in the early days of the industry, it was certainly the case that most strategies were relatively simple – being macro funds or other directional strategies such as CTAs, or long/short equity funds focusing on liquid, large-cap stocks.
Those were the days: management fees were low – usually 1% a year (not 1.5% or 2%, as is commonplace today); and redemption terms generally easy – with investors able to exit monthly or, at worst, every quarter.
The great benefit of those early strategies was, of course, liquidity. Even if the manager messed up, the portfolio could usually be liquidated quickly.
But, over time, ever more managers have launched funds with longer and longer investment horizons across an ever-widening array of strategies, asset classes and instruments, often with widely varying degrees of liquidity.
And this has meant investors agreeing to lock up money for longer periods; or to accept longer notice periods before they can make redemptions; or gate provisions that limit the amount that can be redeemed at any one dealing date; and/or side pocket provisions that allow the manager to suspend redemption terms for a portion of the portfolio.