Average Hedge Fund Lockups Diminish

The number of hedge funds employing lockup periods during which investors must wait to reclaim assets shrunk in recent years, according to research from eVestment.

The investment intelligence firm also observed shortening average lengths among hedging products that do employ lockup periods—a fact credited to growing demand for liquidity in challenging and volatile markets. Both hedge funds and funds of hedge funds (FoHFs) are covered in the report.

Since 2007, the number of hedge funds employing no lockup period moved into the majority, climbing to about 51% from a base of about 46%, according to the eVestment report “Hedge Fund Lockups & Capital Cycles.” For FoHFs, the no-lockup group increased from about 54% to about 56%.

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Other figures outlined in the report include a drop from 39.8% to 36.5% for hedge funds employing 12-month lockups. For FoHFs, the change was slightly less, falling to 35.4% from 36%.

Industry averages include 9.9 months of hard lockups and 13.29 months of total lockups for hedge funds. For FoHFs, the averages are 10.94 months of hard lockups and 13.31 months of total lockups. Including funds with no lockups would cut the total lockup average to 5.6 months across the industry, according to the report. 

Hedge Funds and FoHFs using lockups but coming in below the industry averages included the following:

– Fixed-income multi-strategy, with 8.5 months hard and 11.5 total lockup on average.

– Macro, with 6.87 months hard and 11.03 total.

– Managed futures funds, with 4.5 months hard and 9.5 total.

Hedge Funds and FoHFs coming in above the industry averages include hedging products taking on distressed, event driven/special situation and securitized credit strategies.

Also notable in the report are figures showing most hedge funds continue to use a monthly redemption cycle. Those with the highest lockups—namely distressed and securitized credit funds—tend to utilize quarterly cycles for allowing investor redemptions.

More on eVestment’s research can be accessed here.

House Puts Lid on Fiduciary Update

The House voted Tuesday to pass the Retail Investor Protection Act, which would delay any fiduciary updates issued by the Department of Labor (DOL) or the Securities and Exchange Commission (SEC).

House members voted 254-166, largely along party lines but with some Democratic support, to approve the Retail Investor Protection Act. Passage of the act into law is widely deemed impossible, given the political makeup of the U.S. Senate and the White House.

During hours of debate, many House members took up arguments warning additional limits placed on advisers and broker/dealers would do more to damage their clients’ retirement preparedness than stamp out conflicts of interest.

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“Due to technological advances and the relatively low cost associated with operating an online platform … brokers can offer trade and investment advice for as little as seven dollars,” said Jeb Hensarling, a Texas Republican and chairman of the House Financial Services Committee. “Should a fiduciary standard be applied to these online brokers, the impact on investors could be … higher fees per trade, higher fees for investment advice, or brokers may simply stop providing this investment advice to less affluent customers altogether.  That is not fair.” 

Democratic members opposed to the bill argued that a unified fiduciary standard would ensure advice in retirement planning settings is given in investors’ best interests.

Advisers and broker/dealers have long worried a regulatory update could force all financial professionals providing advisory or brokerage services to retirement plan participants into a fiduciary relationship.

Within such a relationship, advisers or broker/dealers are required by law to put the investors’ interests ahead of their own. For example, an adviser could be prohibited from promoting IRA rollover services to existing clients if he or she would receive more in fees because of that promotion.

Raising the Stakes for Brokers/Dealers

Many advisers working with retirement plans are already held to such a fiduciary standard. Broker/dealers could have more to lose as they are required by law to offer service and advice that is deemed only “suitable.”

Another stipulation in the bill would force the DOL to wait until the SEC has released a fiduciary update before issuing its own. That tactic could significantly lengthen the time before an update is enacted, as the DOL’s new definition could be released soon—perhaps within the next few weeks.

According to the Retail Investor Protection Act, “the Secretary of Labor shall not prescribe any regulation under the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.) defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the Securities and Exchange Commission issues a final rule relating to standards of conduct for brokers and dealers pursuant to the second subsection (k) of Section 15 of the Securities Exchange Act of 1934.”

The bill goes on to say the Securities and Exchange Commission (SEC) cannot issue its final rule until determining whether retail investors are being harmed by the differing standards and whether adopting a uniform fiduciary definition of would adversely impact retail investors’ access to personalized investment advice.

During a recent speaking engagement, Assistant Secretary of Labor Phyllis Borzi of the DOL’s Employee Benefits Security Administration (EBSA) said the agency is “very close to finishing” a new definition of fiduciary She assured the audience that EBSA is working closely with the SEC on the regulations.

For input from industry groups on the pending definition updates, see “Groups Urge SEC to Uphold Fiduciary Standard.”

Text of House bill H.R. 2374 is here.

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