Citi examines impact of crisis on hedge funds
23 July 2010 New York
Image: Shutterstock
Citi Prime Finance launched its Citi Perspectives series this week with the release of the debut paper, "The Liquidity Crisis & Its Impact on the Hedge Fund Industry." Leveraging Citi's access to the hedge fund industry, the report is a result of in-depth, one-on-one interviews, not a multiple choice questionnaire, and represents an array of industry opinions including hedge funds, investors, intermediaries and service providers.
"Given the challenges of the past 24 months, it's essential that we deliver timely and thoughtful information to our clients," said Alan Pace, Citi head of prime finance in the Americas. "Citi Perspectives will serve as an information resource as we all prepare for the industry to evolve."
The first Citi Perspectives publication, "The Liquidity Crisis & Its Impact on the Hedge Fund Industry," is comprised of three parts, with the first two sections focusing on process and structural issues that emerged in the hedge fund industry during the liquidity crisis and responses to those issues that occurred over the following 18 months.
From an investor's perspective, the survey highlights the concerns about adjacency risk in hedge fund portfolios that emerged during the crisis; the difficulties encountered when trying to move toward separately managed account and "Fund-of-One" structures; the subsequent shift in attitude back toward hedge funds' co-mingled vehicles in response to increased "institutionalisation" of those participants; and a strengthening of the due diligence process.
From the hedge funds' perspective, the survey highlights the general de-levering of portfolios that occurred during the crisis, implications of that move on funds' prime brokerage relationships and the industry-wide drive to secure a more stable and institutional mix of investors subsequent to the crisis. Specifically, the report explores the infrastructure investments, the increased transparency, expanded liquidity options and expanded level of investor communications that leading hedge funds are offering today to attract and retain direct institutional allocations.
From the Fund of Funds' perspective, the survey highlights the mismatch between the terms they offered investors on their portfolios and the liquidity they were able to realise on a fund's hedge fund investments during the crisis. The report also explores how, in response to this situation, portfolio construction has evolved, with Fund of Funds now aligning investment strategies across a "liquidity spectrum" and grouping strategies with similar liquidity profiles.
The final part of the survey extrapolates implications from recent changes and explores how the hedge fund industry is likely to evolve in the coming 18 months.
The addition of liquidity as a third dimension to consider in addition to style and leverage is moving the hedge fund industry toward a set of "segments" which in turn is helping to blur distinctions between the long-only, alternatives and private equity silos.
Recent strides toward "institutionalising" their profile has positioned the most-liquid hedge fund segment to compete directly with the growing Alternative Mutual Fund and UCITS funds for allocations being diverted away from "active" long-only managers.
Investors looking to take on exposure within an asset class can increasingly choose from a broad array of investment structures with differing risks, returns, liquidity profiles and fee structures in order to achieve diversification and address liability shortfalls. Hedge funds, particularly larger funds, are likely to benefit in this environment and receive a new wave of investor allocations as capital moves off the sidelines and "Asset-based structures" become the new investor allocation paradigm.
The full paper is available upon request and can be read in its entirety at the Citigroup website.
"Given the challenges of the past 24 months, it's essential that we deliver timely and thoughtful information to our clients," said Alan Pace, Citi head of prime finance in the Americas. "Citi Perspectives will serve as an information resource as we all prepare for the industry to evolve."
The first Citi Perspectives publication, "The Liquidity Crisis & Its Impact on the Hedge Fund Industry," is comprised of three parts, with the first two sections focusing on process and structural issues that emerged in the hedge fund industry during the liquidity crisis and responses to those issues that occurred over the following 18 months.
From an investor's perspective, the survey highlights the concerns about adjacency risk in hedge fund portfolios that emerged during the crisis; the difficulties encountered when trying to move toward separately managed account and "Fund-of-One" structures; the subsequent shift in attitude back toward hedge funds' co-mingled vehicles in response to increased "institutionalisation" of those participants; and a strengthening of the due diligence process.
From the hedge funds' perspective, the survey highlights the general de-levering of portfolios that occurred during the crisis, implications of that move on funds' prime brokerage relationships and the industry-wide drive to secure a more stable and institutional mix of investors subsequent to the crisis. Specifically, the report explores the infrastructure investments, the increased transparency, expanded liquidity options and expanded level of investor communications that leading hedge funds are offering today to attract and retain direct institutional allocations.
From the Fund of Funds' perspective, the survey highlights the mismatch between the terms they offered investors on their portfolios and the liquidity they were able to realise on a fund's hedge fund investments during the crisis. The report also explores how, in response to this situation, portfolio construction has evolved, with Fund of Funds now aligning investment strategies across a "liquidity spectrum" and grouping strategies with similar liquidity profiles.
The final part of the survey extrapolates implications from recent changes and explores how the hedge fund industry is likely to evolve in the coming 18 months.
The addition of liquidity as a third dimension to consider in addition to style and leverage is moving the hedge fund industry toward a set of "segments" which in turn is helping to blur distinctions between the long-only, alternatives and private equity silos.
Recent strides toward "institutionalising" their profile has positioned the most-liquid hedge fund segment to compete directly with the growing Alternative Mutual Fund and UCITS funds for allocations being diverted away from "active" long-only managers.
Investors looking to take on exposure within an asset class can increasingly choose from a broad array of investment structures with differing risks, returns, liquidity profiles and fee structures in order to achieve diversification and address liability shortfalls. Hedge funds, particularly larger funds, are likely to benefit in this environment and receive a new wave of investor allocations as capital moves off the sidelines and "Asset-based structures" become the new investor allocation paradigm.
The full paper is available upon request and can be read in its entirety at the Citigroup website.
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