Daily pricing of hedge funds comes at a cost
The introduction of 'daily pricing' for hedge funds may placate anxious investors, but it will only end up hurting investment performance, says Certitude chief executive Craig Mowll.
Mowll - whose company Certitude Global Investments is a 'fund of hedge funds'-style funds manager - also argued that the belief that daily pricing equates to "instant fund access" is "misguided".
"The truth is that these funds cannot liquidate the entirety of their assets in 24 hours and return investors' money in several days. So investors are missing out on the benefits of full performance and are being drawn in by a benefit that doesn't exist," Mowll said.
"Traditionally, the role of absolute return funds [ie, hedge funds] is to protect on the downside at the same time as enabling investors to participate in potential upside performance," Mowll said.
Hedge funds provide diversification to investors by providing investment returns via exposure to investments that are not correlated to equities or fixed income, he said.
But the methods used to "manufacture liquidity" in order to calm investors fears about hedge funds "locking up" in fact defeat the purpose of having a hedge fund in the first place, he added.
These methods include overweighting to cash (in some cases as high as 35 per cent); confining the investment strategy of the fund to a narrow band, thereby increasing risk rather than spreading it; and "hugging" the index, which fails the diversification test, Mowll said.
But at the same time, many hedge fund managers are continuing to charge the higher fees that are associated with the active management required for a "true" absolute return fund, he said.
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