Risky Business: Hedge Funds Can Freeze Redemptions

Maybe it's just me, but is anyone else amazed that when hedge funds run into trouble (as many have recently by investing in mortgage-backed securities) and investors ask for their money back, the fund can simply say no? This is astonishing to me.

Now, don't get me wrong. Managers can run their funds any way they want. Typically, fund rules stipulate that investors can withdraw money only during certain windows (quarterly and annually are most common). That makes sense, as it can be tough to put on positions if people can just come and go as they please. But how about when you ask for your money back during a pre-approved window and the hedge fund comes back and says "Sorry, but we have frozen redemptions."

Bear Stearns (BSC) did this with their recent funds that ultimately went bust and are being sued right now because of what they allegedly told investors regarding the riskiness of the portfolios when they tried to get their money out.

Why on earth would anyone invest in a hedge fund that gave you no guarantee that you could take your money out if you wanted to? How can hedge funds get away with simply denying one's request? Do any readers out there invest in hedge funds? Are you worried about wanting to get your money out at some point and being told you can't? Seems risky to me...

Full Disclosure: No position in BSC at the time of writing.

Comments

[Jon Lugiano:]

gating provisions, pal....it's right there in the LP agreement...

2007 Aug 02 01:56 PM

[Go West:]

Try reading an OM buddy.

2007 Aug 02 05:37 PM

[dntee:]

As long as its in the PPM/OM and hence the investor has agreed as a condition of his investment, the Investment Manager has the ability to suspend redemptions or impose redemption gates.

2007 Aug 02 05:48 PM

[arbitragemp:]

ditto to the above.....it's pretty clear if you read the docs.....this is NOT the writeable central issue....nor is it a surprise...

2007 Aug 03 10:45 AM

[Go West:]

You are embarrassing yourself with this blog, I thought this site was for professionals

2007 Aug 03 02:11 PM