Fund-of-hedge-fund (FOHF) providers will need to rethink how liquidity is offered to investors, after the Australian dollar's slide in 2008 sapped asset managers' cash and forced them to freeze applications and redemptions.
FOHFs in Australia have a big liquidity mismatch because their providers offer monthly redemptions to investors, even though the underlying funds can only manage quarterly or longer payments.
"If the underlying funds can only return money quarterly, then there's no point in offering an FOHF with monthly liquidity because the FOHF has to manage that mismatch with its assets," Standard & Poor's fund analyst Simon Scott said.
"They will not receive enough proceeds each month to pay any redemptions.
"FOHFs are likely to restructure by making their redemption payments consistent with how often their underlying managers are capable of meeting those payments."
Scott said that is most likely to be quarterly.
It is currently unsustainable for some FOHFs to be offering monthly liquidity, as payments cannot be made to investors if there is an outflow surge.
"What these products normally do is they hold onto a small cash position and, together with their inflows, can normally easily cover any redemption requests," Scott said.
"The problem we have got is these funds are receiving no inflows from investors or the underlying funds, so cash balances have dropped massively after paying for the increase in currency hedging costs."
Scott's comments came after the research house withdrew its ratings on Goldman Sachs JBWere's Multi-Strategy Fund, which was terminated on 2 February. The fund's applications and redemptions have been frozen since November.
