Lockups and Fees — Evening Brief – 08.09.24
New hedge funds from big names are said to have longer lockups than ever before. Investors’ objections, on the other hand, seem to be more about fees than liquidity.
Hudson Bay Capital Management is the most recent firm to inform investors that the fund will require a minimum of two years to exit, rather than the usual one, according to Bloomberg. The report stated that the only motivation is to receive a reduced management fee.
It comes at a time when the SEC has attempted to improve transparency on such fee arrangements in a now-defunct round of rulemaking. Investors, including the Teachers’ Retirement System of Texas, are taking action, as seen by a recently prepared letter to the hedge fund industry, which is gaining traction among institutional investors. The reported number of signatories to the letter has doubled to 60 allocators.
“This misalignment has become increasingly evident in recent years, as risk-free rates have reached mid-single digits. A hedge fund may collect significant incentive fees based solely on skill-less returns generated from short rebate, securities lending, unencumbered cash, etc. These returns are easily obtainable by LPs outside of a hedge fund structure for free,” the letter stated.
The Texas Teacher pension fund is a significant investor in hedge funds, ranking among the world’s largest allocators. It now manages a portfolio valued at $20 billion, a figure comparable to that of prominent multi-manager fund-of-fund firms.
The retirement system was among the first public pension plans to invest in hedge funds in the early 2000s. Today, many others have participated, including New Mexico Educational Retirement Board, Employees Retirement System of Texas, and Fire & Police Pension Association of Colorado, to name a few.
Although the reason for the longer lockups is not well known, big multi-strategy firms like Balyasny Asset Management and Millennium Management are reported to have imposed three-year and five-year lockups, respectively, in recent fund introductions.
Many public pensions are worried about private equity and private credit funds having long exit times. This could be another problem when trying to put money to work in diversifying strategies.