A Run on Hedge Funds: Redemption Strategies and Responses
Lawrence Cohen and Thomas M Griffin
Gibbons
January 2009
The global economic crisis has had a significant impact on the hedge fund world. One of the most striking developments has been the rush by many investors to redeem their holdings. Individual and institutional investors alike, in reaction to dismal returns on their investments (the average fund has lost 20% this year), have engaged in a classic run on the bank. In response, dozens of hedge funds have suspended or restricted redemptions – if such actions were authorised by their governing documents.
Preventing an investor from exiting a fund, unless the investor had a reasonable justification (eg a legal requirement or financial emergency), was once anathema to all but the weakest funds, as it was often taken as a sign that the fund was in distress and might even collapse. In the current environment, even a giant, public fund like Fortress has been forced to take this defensive measure. In a 3 December 2008 SEC filing, Fortress Investment Group announced that it had suspended redemptions from its largest hedge fund and three of its feeder funds, stating that “the boards of directors and general partner of the applicable feeder funds have evaluated the most appropriate course of action to take in response to the requested redemptions in light of applicable requirements and current market conditions, and have acted unanimously to temporarily suspend pending redemptions from the fund.”
