Hedge funds swap some liquidity to boost returns

London (Reuters) - Hedge funds are increasingly turning to alternative assets to boost returns, though such investments are often less liquid than traditional financial instruments, said Nils Tuchschmid, global head of portfolio management at Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz).

Speaking at the Reuters Hedge Fund and Private Equity Summit, Tuchschmid said: "Some of the new strategies are slightly less liquid. This is the price you have to pay to get exposure."

Alternative asset allocation strategies range from direct asset-backed lending and securitization to non-performing debts, life insurance instruments and property. Data suggests that such strategies are receiving increasing investment as hedge fund operators aim to boost returns.

"The idea of the new strategies is to boost alpha," Tuchschmid said, or superior investment returns independent of the performance of market benchmarks. He added: "I have a tendency to believe that if a strategy is less liquid, it has greater volatility."

Tuchschmid said enhanced volatility in one investment needed to be considered in the overall spread of a portfolio. "You really need to have fund managers thinking about this," he said.

The growing use of alternative asset strategies also offers investment banks new business opportunities, Tuchschmid said. "There is a mismatch sometimes between individual funds and funds of hedge funds. One may have more liquidity; the other has less. So we step in and provide the liquidity."

Tuchschmid also said Credit Suisse was preparing products for the U.K. market in expectation that the Financial Services Authority will open the hedge fund sector to retail investors, probably in 2008. "We are working on this," he said. "I can't make any comment now."

The Reuters Hedge Fund and Private Equity Summit is taking place in London and New York Monday through Thursday.