Quantedge launching longer term share classes

Exclusive! Quantedge launching longer term share classes

It takes a brave fund to reduce its liquidity, going from monthly to fixed-terms of 3-years and 5-years. Especially when even Steve Cohen cannot pull it off:

“Point72 no longer plans to lock up investor capital for as long as three years. Those proposed terms had made some investors wary.” – Bloomberg

In typical Quantedge style, their rationale for why the long-term lock is actually a good thing is very professorial and reminds me why I am not the hedge fund manager instead. See how I slowly walked into their trap / enlightenment.

Q: What is the lock-up period for a PE fund? 7 years? 10 years? A: Well actually if KKR maximizes its extensions that would be 17 years. But if I invest in a PE fund I expect higher returns, usually expressed in terms of multiples.

Q: What is their target IRR? 25%? 20%? And what is their actual realized returns if you account for cash drag? A: Depends on the vintage year (tip: when in doubt, give a non-answer). But probably less than 20% if the IRR is say 25%.

We interrupt this interview-put- together-from- a-few- discussions with some friendly statistics from Preqin:

Now we switch to the annualized 5-year returns of Quantedge by vintage month:

This means that whichever month you put money in, the worst you can do is about 12% net returns (not IRR), and if you invested after the financial crisis you got up to 50% annualized. Not too shabby I must say. Now back to our Q&A:

Q: So why is that investors can accept a potential 20% return without knowing when they get their money back, but cannot accept a 5-year fixed-term structure from a fund which has a proven 10-year track record of annualizing almost 30%? A: The allocation team for PE is different from the one investing in hedge funds.

Q: Investors would accept lower returns for worse liquidity? A: The hedge fund investor does not think in terms of 5- or even 3-year locks. Your proposed structure will be in no man’s land. It doesn’t fit into any allocator’s bucket.

Obviously, my attempt to inform Quantedge that the world does not invest just for returns did not work. Because not only did they go ahead with the long-term fixed structure plan, they are going to hard-close the existing monthly share class and will at some point in time give back monies in this share class.

So it’s either you become a medium-term investor or you stop becoming an investor. But it’s not all bad.

You get reduced management fees which is a win-win for everyone. Sort of.

Watch out for this space on what to do if you have to switch over to the 5-year share class.