The excessive focus placed on daily liquidity by investors, demonstrated by the introduction of daily priced hedge funds in the Australian market, is not addressing their real concerns and could have detrimental effects on returns.
"Post global financial crisis (GFC), we've seen the re-entry of hedge funds and it seems to be that the market entry point for any hedge fund is it must have daily liquidity," Certitude Global Investments chief executive Craig Mowll told InvestorDaily.
"Daily liquidity has been a knee-jerk reaction to addressing a surface issue, but it actually does not resolve the root cause and the real concern people have."
Mowll said it only addressed a surface issue, rather than the root cause of why investors were requesting it.
"When you ask why, it's [because they don't] want their funds to lock up again; that's what they're trying to prevent," he said.
"But this myth of daily liquidity equating access doesn't exist in that scenario."
It could still take up to three months or longer to return all investor money if a daily liquid fund needed to liquidate itself in another GFC scenario, he said.
In addition, some fund profiles revealed that managers were creating or "manufacturing" liquidity by holding up to 35 per cent of the fund in cash, he said.
"They're not holding cash in their fund to protect on the downside, they're holding the cash in their fund so that they can afford to pay redemptions out, should all of a sudden they have to pay out investors in a rush, so only 65 per cent of your money is invested, but they're charging 100 per cent of the management fee," he said.
"A liquidity premium at the moment is costing investors between 100 and 500 basis points in performance by going with a daily liquid fund."
He said the moment liquidity was manufactured, it started to have an impact and skew the benefits of investing in an absolute return fund, which included no correlation to equities and fixed income, upside performance with downside protection, low beta and greater diversified alpha, and lower volatility.
"It's actually impacting the overall performance of the investment and defeats the purpose," he said.
"It's not performing true to label so investors don't know what they're getting into. The label of daily liquidity is very attractive, but they haven't peeled it back enough to see what's behind it."
He said Certitude used a managed accounts platform, which prevented funds from going into lock-up and therefore addressed the root cause of investors' concerns.
