Hedge Fund Investors Bailing

Posted by Bull Bear Trader | 4/04/2008 08:15:00 AM | | 0 comments »

Hedge funds are seeing an increase in redemptions, causing some funds to liquidate assets at unattractive prices in order to meet cash withdraws. Some larger funds are reacting by restricting withdraws, or outright restructuring. Given that hedge funds have a hard time operating when either investors leave or credit drys up, this is certainly not good news for some funds.

Of interest is how many funds use a "gate" to limit how much can be withdrawn each quarter. Unfortunately, investors who fail to put in a redemption requests early are placed at the back of the withdraw queue. Furthermore, investors that did not get paid in full for the previous quarter get priority with a “stacked gate” structure. Knowing this, some investors, who may otherwise stay put but are nonetheless getting nervous, make redemption requests to avoid being last in line, just in case they decide later to withdraw their funds.