Hedge funds are champing at the bit to bring their strategies to the masses, but there are concerns over how well they'd perform in a crisis.
“How big can these markets get, and how much can they absorb, is going to be a challenge,” Girish Reddy, head of global hedge funds of funds at Kohlberg Kravis Roberts & Co. LP, and founder and managing partner of Prisma Capital Partners LP, said today at the Bloomberg Hedge Funds Summit in New York.
“There's a finite number of strategies, a finite amount of capacity,” he said. “A lot of these strategies need liquidity. The question is, can the market provide it when they need it? During stress, they could be putting even more stress on the system.”
His remarks were in response to statements by fellow panelists Averell Mortimer, president and chief executive of Arden Asset Management, and Charles Stucke, chief investment officer at Guggenheim Investment Advisors, extolling the opportunity for hedge funds to get into mutual funds.
Assets in liquid alternatives mutual funds had grown to $105 billion as of the end of April, up from $66 billion in April 2010, according to Morningstar Inc.
“This is the tip of the iceberg for how big this market can be,” Mr. Mortimer said. Arden recently teamed up with Fidelity Investments to offer a mutual fund of hedge funds.
Guggenheim doesn't offer liquid alternatives but is “aggressively” studying the option, Mr. Stucke said.
“Fixed-income rates are really, really low, and equities have had a great run but are normal today,” he said. “People are moving toward alternatives as they look for something different in their portfolio.”
Ray Nolte, managing partner and chief investment strategist at SkyBridge Capital II LLC, said credit or event-driven strategies are two liquid alternatives strategies that advisers need to be wary of.
“Credit or catalyst-driven strategies are probably going to end badly,” he said. “Investors typically want liquidity when there's some kind of crisis, which is the exact time you don't want to be liquidating those strategies.”