Hedge fund investors are not keen on parting with their cash for long. As the Alternative Investment Management Association's 2011 survey of institutional investors found, investors have a preference for "the ability to receive most, if not all, of [their] capital within a year or less with minimal, if any, constraints."
Yet investors may soon have to wait longer to redeem their capital from their hedge fund investments. This is because market developments may give managers more leeway in negotiating terms that permit them to hold on to investors' capital.
In particular, the secondary market trading of hedge fund (and private equity) shares is signficiantly increasing. As Amy Or recently reported in the Wall St. Journal, "the notional value of these [private fund] trades is expected to more than double to $146 billion next year [2013] from an expected $65 billion this year."
An increase in secondary trading may give managers greater bargaining power when it comes to liquidity terms, such as how often investors can redeem their capital and how long an initial lock-up period may be. This is because if investors can more easily sell their hedge fund stakes to another investor, it will be more difficult for them to credibly claim that easy access to their capital is a crucial aspect of their investment.
And it seems like this may become the case. Or's story also notes that discounts on secondary market hedge fund shares dropped to 4% from 25% last year.
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