The "value" of any exchange-listed instrument with sufficient liquidity (ie, you're not > 10% of ADTV) is exactly what the market last traded at. You're only fooling yourself if you argue otherwise. On the other hand, a private startup business might only be "valued" once every 2-3 years... and in those cases, it's always via back-room negotiation between closely involved parties who have spent months on due-dil. If you need to get out of a private investment *tomorrow*, you very possibly need to take a haircut of anywhere from 30%-70% of what fair value probably should be. It's just a completely different world. In reference to your question about balancing investor/manager interests... I believe firmly it is never in the manager's interest to force an investor to stay in a fund against their will. It is in EVERYONE's interest for investors who need to withdraw from a fund to do so. The argument that this is some how a slippery slope doesn't make sense to me... that allowing monthly redemptions are some how the same as weekly/hourly/daily redemptions. They're not the same thing. For the investor, there's not much marginal utility from being able to redeem daily rather than monthly. For the manager, there's a lot more work involved in going from monthly to daily... but frankly a mutual fund handles it just fine, and I don't see why I couldn't if they paid me the additional expenses involved.
It's all negotiable and highly dependent on your strategy, expected returns but even moreso, the market that you are trading.
You said: " For the investor, there's not much marginal utility from being able to redeem daily rather than monthly" And I fully agree..but many investors demand this as if there is some incredible benefit to it. One could equally argue there is not much of a difference between monthly & quarterly redemptions especially if it's monthly with 30-60 days notice and quarterly with just 15-30 days notice. The point I make is what is most important is how does the redemption cycle match the trading frequency/cycle. The second point is: I am not advocating that investors be forced to stay in a fund. We are discussing here redemptions not Gates. I do not believe that investor Gates are good...at all. They have very very limited use, but in 2008 they were used by most of the big multi-year track record funds (the same funds that many advocate are the only ones eligible for investment due to their track record) to in essence lock in investors indefinitely...even Tudor Invest Corp - my favorite manager invoked a Gate!! A Gate is very different from a lockup or a reduced redemption cycle. An dit get worse than Gates with side pockets, which I believe Tudor, my hero also invoked/created. So Gates & Sidepockets are very different from reduced redemptions and lockups for many reasons. Another reason is that at least with a redemption clause or a Lockup..you are informed upfront and you have a choice to invest or not. With Gates & Sidepockets, the fund docs presnet this as a possibility for an emergency..but the Managers arbitrarily and suddenly abuse these clauses. Simply, my argument is a manager should match his redemption frequency and/or lockup to the investment strategy. I also believe a lockup is a useful tool to filter out "fast-money". Seriously, if you invest 0.5M or even 0.1M in a fund and can't stay invested for 3-6 months, you probably should invest only in mutual funds or CDs... even CDs typically have minimum tenors and steep break-penalties. Gates on the other hand, which is a way of temporarily suspending previously redemptions/agreed redemption clauses and forcing you to remain invested is not acceptable except in very very rare scenarios. I still believe that any strategy that requires time for your investments to "mature" 9e.g. fundamental value, global macro, etc) similar to what occurs in PE & VC land do require lockups or at the minimum less frequent redemptions e.g. quarterly. I think the PE & VC crowd use the absence of a freely traded market to justify a lot of games they play like "mark-to-fantasy" valuations. But this is a different philosophical argument we can agree to disagree on. Thanks to you and all for sharing...it's always good to hear/learn different opinions and viewpoints. I pray the debate/dialogue continues. Thanks again.
You're doing a lot of thinking rationalizing what is pretty much common sense. But you are omitting key points: 1) It's other people's money, not yours. So it's a question of what works for them and not you. Your job is the balancing act of your strategy & trading versus the best liquidity possible. 2) Liquidity events trump all your rationalization. Whether it is a quick opportunity or a problem that needs to be fixed, it matters a whole lot more than a few extra percentage points from the hedge fund in question. If you need the longer redemptions or lockups, that is one thing. It simply makes your fund less attractive. Nowadays, investors want quick liquidity, for good reasons, and that is something you need to consider.
It's simple, so I don't really get what you guys are arguing about... It's horses for courses, so the actual terms don't matter as long as the expectations on either side are managed. If everyone knows and explicitly agrees the terms upfront, there should be no issues. Obviously, the terms a manager is able to negotiate with an investor will vary depending on the strategies and assets employed.
I was at AR Hedge today, and heard an interesting concept I hadn't come across before. Apparently some funds are now setting multiple tranches. Investors can then choose the level of gate / liquidity they're looking for, but have to pay a differing level of fee to get it. I.e., if you want weekly liquidity, pay 4/20 rather than 2/20. I don't know how popular the concept will be... sure seems overly complicated... but it's at least another tool that can be considered.
Yes, many funds do this. Multiple share classes for multiple fee terms. Yes it is complicated and probably increases your fund administration costs.
FINalternatives Published on FINalternatives (http://www.finalternatives.com) Balyasny Offers Fee Cut, Greater Liquidity In New Share Classes Sep 29 2010 | 12:57pm ET The latest hedge fund set to offer friendly fees and redemption terms to investors is Balyasny Asset Management. The New York-based hedge fund, which manages about $2 billion, is set to introduce a pair of new share classes. One will offer investors a potential break from Balyasnyâs high fees, the other greater liquidity. Currently, investors in Balyasnyâs flagship hedge fund pay 2% for management and 20% for performance, as well as compensation costs for its investment teams. Those fees regularly add up to more than 30% of returns, Bloomberg News reports. Now, well-heeled investorsâthose willing to pony up at least $10 million, anywayâwill have the option of paying 2% for management and 30% for performance, rather than paying the variable compensation costs. But investors in the new share class will see their money locked up for a year, with a 4% early withdrawal penalty. Investors more worried about liquidity can instead choose Balyasnyâs other new share class, which will continue to charge 2% and 20% along with the compensation costs, but which will feature monthly liquidity from day one. The lower-fee share class will offer quarterly liquidity after the first year. Balyasnyâs fee cut comes after two other prominent hedge funds, Citadel Investment Group and Renaissance Technologies, announced plans for similar moves. Source URL: http://www.finalternatives.com/node/14004
Happy New Year, ALL! Contiuing this dialogue/debate from last year. What are people's thoughts on eliminating the fixed management fee in exchange for a higher performance fee e.g. 0 & 30 or 0 & 40 instead of 2 & 20?? What are people's thoughts on hurdle rates, e.g. a fixed hurdle of say 5% or a floating hudle of 1 month or 3 month LIBOR. Thanks.