More fund-of-hedge-funds may block redemption requests as they draw on existing credit lines and use available cash to fund their currency hedges, according to research houses.
The big fall in the Australian dollar in October used up a lot of investment managers’ cash to fund currency rolls, Lonsec senior investment analyst of managed funds Deanne Fuller said.
“From a broad market perspective we are seeing an uptick in client redemptions,” she said.
“Liquidity pressures are building from a few different angles… more of the underlying hedge funds themselves are starting to impose fund freezes.”
Lonsec has temporarily put the sector on fund watch – meaning no new monies should go into the sector.
Select/Gottex Market Neutral Fund and Goldman Sachs JBWere’s Multi-Strategy Funds have already frozen redemptions, due to increased withdrawal requests.
Select/Gottex’s product has temporarily slashed its currency hedging 50 per cent, leaving clients exposed to fluctuations between the Australian dollar and greenback.
“We do not expect the Select/Gottex situation to be more widespread. Other funds [in the sector] remain fully hedged and have met their contracts and still have liquidity left,” Fuller said.
Morningstar analyst Tim Murphy said it would be no surprise if more fund-of-hedge-funds freeze redemptions as they get hit with liquidity issues arising from increased redemptions, and an inability to fund their currency hedges.
“These issues, combined with the dismal performance of most hedge funds, will no doubt prompt retail investors to question what they are getting,” Murphy said.
Standard and Poor’s fund analyst Simon Scott said there is a chance funds are going to be low on cash and may have to freeze redemptions if large requests come through, following the Australian dollar’s abnormal moves and its effects on currency hedging.
