Hedge funds must shift towards achieving "true" liquidity at a holdings-based level, Ironbark Asset Management's head of distribution said.
"There are more and more tools available to an alternate asset manager or manager of managers, where you can actually get liquidity - it doesn't have to be through holding lots of cash," Ironbark Asset Management head of distribution Alex Donald told InvestorDaily.
"So it's now not that case that you need to manufacture liquidity, you can get true liquidity."
InvestorDaily published an article yesterday on investors' excessive focus on daily liquidity, which had resulted in hedge funds creating or "manufacturing" liquidity by holding up to 35 per cent of the fund in cash.
Donald said he disagreed with the view that hedge funds needed to have high levels of cash to provide daily liquidity and also that a liquidity premium eats up between 100 and 500 basis points of performance.
"If you have a system whereby you get underlying holdings-based analysis, you know the liquidity of what you're investing in," he said.
"In the case of a daily priced unit trust, are you truly offering daily pricing at the underlying asset level?"
Separately managed accounts, exchange-traded funds and alternate fund replication strategies could all be used as tools by managers to achieve "true" liquidity, Donald said.
"The only way we and some others are able to do that is through the way we build our risk systems to give us transparency at a holdings-based level of what we're actually invested in," he said.
"We will not invest in a manager unless they give us holdings-based information on their portfolios so you'll know at a securities level for that manager, what is the liquidity profile for that portfolio et cetera, which gives you an incredible amount of transparency.
"In a traditional hedge fund of fund model, you couldn't do that."
The market has moved through a significant number of perspectives, including the argument that investors cannot achieve the kind of returns that alternate assets purport to produce without paying a liquidity premium, Donald said.
"There are quite a number of businesses that can quite prove significantly not to be the case," he said.
Furthermore, there will be an eventual shift towards the approach of accomplishing daily liquidity at an underlying level, as there is a significant push for transparency by clients searching for truly liquid strategies, he said.
