Investors in hedge funds are becoming increasingly willing to lock up their money for longer and invest in less liquid strategies, in a sign some are choosing the chance to earn bigger returns over easy access to their cash. Several prominent hedge funds have raised hundreds of millions of dollars this year for funds which keep hold of their clients' cash for years, sometimes as long as three, and much longer than the typical 30 to 45 days the average fund requires.
This trend reflects a sea-change in sentiment since the financial crisis, when investors flocked towards the most liquid funds so that they could quickly convert their holdings into cash during times of heightened market volatility. But four years of earning next to nothing on government bonds, and even longer grappling with seesawing stock markets, is encouraging some to entrust hedge fund managers to find them returns from more esoteric assets that can take time to exploit.
"I think the quest for yield is in its early stages, not its late...Investors are looking for longer lock-ups for direct lending, for distressed and for structured credit, for things you can't do otherwise," Anthony Lawler, portfolio manager in the fund of hedge funds team at Swiss asset manager GAM , said.
The more liquid strategies have attracted the bulk of new cash flowing into the hedge fund industry in recent years. Commodity Trading Advisors, funds which use computer codes to speculate on futures and sometimes give clients the option to change their holdings daily - very rare in the industry - almost doubled in size between 2008 and end-2011 when assets topped $188 billion, according to data group Hedge Fund Research.
This year, however, it is fixed income-focused managers gaining in popularity, including those in structured credit, with the likes of CQS and Brevan Howard launching new funds. Structured credit - which can range from trading mortgage-linked securities to credit derivative portfolios - is one of the best performing strategies in 2012, driven by huge gains made from betting on a recovery in the US housing market.
Steve Kuhn's $3 billion Pine River Fixed Income Fund, for example, soared more than 23 percent this year to the third week of August while Canyon Capital, which also trades US mortgage debt, has seen its Value Realisation Fund rise almost 10.7 percent by the end of July, data seen by Reuters shows.
Many assets linked to mortgages are illiquid - meaning there are fewer buyers and sellers than in other markets - so hedge funds need longer lock-in periods so that they can easily meet redemption requests if their own investors head for the exit. "This isn't us pushing; this is a certain group of investors coming to us and saying that they are willing to lock up their money in order to get exposure to these illiquid opportunities," said the European head at a hedge fund currently raising money for structured credit investments.
Earlier this year Brevan Howard, the $37 billion hedge fund giant, launched the Credit Value Master Fund, which invests in mortgage-backed securities, collateralised debt obligations and illiquid securities. London-based CQS, meanwhile, closed its ABS Alpha Fund to new investors in February, a source familiar with the launch said. The $250 million fund has a minimum one-year lock-up period and a maximum 25 percent redemption gate. Dozens of hedge funds have launched distressed debt products over the past few years to target assets they believe European banks will offload at discounted prices in coming years.