Give Us Our Money Back - Pitfalls of Lock Ups
In today's "Investors Mull How to Get Out Of Hedge Funds: Market Turmoil Highlights Notoriously Tricky Rules For Redeeming Shares." Wall Street Journal reporters Jeff D. Opdyke and Eleanor Laise paint a grim picture for investors in search of an exit. Besides the fact that many funds only permit redemptions at the end of a month or quarter, written notice is often required, sometimes as much as sixty to ninety days in advance. Even then, punitive fees may be imposed. Additionally, not all investors are equal if side letters exist that favor some over others.
For hedge funds already in crisis mode, redemptions may not come in time to stem further problems nor will they shield an investor from already realized losses. Moreover, fund managers may freeze redemptions, arguing that to do otherwise would imperil their ability to stay in business.
If that isn't gloomy enough, consider that investors who successfully withdraw money from a struggling hedge fund may have to give back. "If a hedge fund fails, in some cases a bankruptcy trustee or other investors may sue investors who have already redeemed money and try to force them to pay that money back into the fund, say Nixon Peabody's Mr. Mungovan and his co-chair of the firm's alternative investments litigation practice, Jonathan Sablone. The trustee could argue that the hedge fund didn't value its assets correctly and that investors withdrew more money than they were entitled to."
Valuation alarm bells are nothing new to this blog. We've been touting the need to assess a manager's valuation policies and procedures for months. As stated countless times before, we've asserted that valuation critically drives reported performance. Reported performance determines fees and fees drive risk management and asset allocation decisions. Now we see firsthand that valuation likewise drives the ability to liquidate.
Being locked up is no fun. For pension funds in desperate need of cash, the current state of affairs is agonizing.
