Search for Sticky Money

Chidem Kurdas

Are some investors better than others for a hedge fund? Managers  have long considered who they want as their client – and who they don’t want – but the financial crisis revealed the importance of this question.

When investors in large numbers demanded their money back in 2008-2009, managers had two choices. Either they delayed redemptions. Or they sold assets in a terrible market in order to pay investors. Both choices were problematical.

The first option created ill will among customers and later led to unwillingness to invest with managers who had in some way or another impeded withdrawals. The second option meant locking in losses that could have been prevented by waiting for asset prices to recover.

After these experiences, some managers decided they would avoid the hot money that moves around a lot—this usually means funds of funds, which tend to redeem quickly when they don’t like the returns.

High-net-worth investors provide the sticky money while institutions are the first to pull out in hard times, says Andrew Schneider, founder of Global Hedge Fund Advisors and HedgeCo Networks.

Hedge funds that are still around after losses in 2008 had a diversified investor base, he said, speaking at conference organized by McGladrey. He recommends that managers have 50% to 60% of their assets from  high-net-worth investors.

Mr. Schneider himself works largely with this group. He says hundreds of hedge fund businesses survived despite bad losses in 2008 because they had relationships with investors—-he calls this relationship money.

Some managers don’t like to be exposed to funds of funds but feel they have no choice—-funds of funds still channel a sizable chunk of industry assets.

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