Industry survey reveals struggles with liquidity and questions on how firms have adapted
While certain categories of hedge funds were able to prove their worth during the recent market selloff, many suffered steep declines that brought them dangerously close to the edge.
In a recent survey, investment consulting firm NEPC found that some hedge fund managers saw drops so dramatic that they came close to tripping NAV triggers in certain contracts, according to Institutional Investor.
Had they actually set off those triggers, which are conditioned on a fund’s NAV declining by a certain percentage within a month or quarter, the counterparties concerned would have been able to “terminate the trading relationship at the expense of the fund,” explained NEPC
But “the subsequent rebound later that month helped give fund managers some breathing room,” the firm added.
The poll of 53 hedge fund managers, which consist of shops that NEPC recommends to its institutional asset-allocator clients, also shed some light on the struggles faced by those operating in the fixed-income markets last month.
“Credit-focused hedge funds described significant disruptions in their markets, and challenges in trading and obtaining financing through repurchase agreements with counterparties,” the firm said.
In contrast, long-short equity funds reportedly had no issues with liquidity or prime-brokerage financing.
NEPC said that investors were concerned about firms’ ability to adapt successfully to the pandemic. In particular, they worried about disruptions to services typically tapped by hedge funds, including middle- and back-office functions such as accounting, auditing, and information technology.
However, none of the respondents to the firm’s survey indicated any problems with administrators, auditors, prime brokers, or data and IT providers. They also reported no issues with respect to workforces transitioning into a remote setup.
“No respondent stated having any issues with this arrangement; many noticed an uptick in communication between employees and teams,” NEPC said, adding that none of the fund managers related any significant operational change in adapting to the new normal.
