Claude Bovet, Managing Director and Head of Alternative Strategies
SFCS Capital
January 2010
The 2008 crisis was substantially defined by investors rushing out of risk-based assets and into the safety of government securities and cash as the classic flight-to-safety. This shift out of risk assets put tremendous pressure on prices: sharp declines in equities, corporate bonds, commodities and all sorts of derivatives; volatility spikes to record highs; bid-offer spreads at unheard of levels and so on. By the end of 2008, it seemed as if the world would come to a screeching halt.
And then some hedge funds halted redemptions.
Pandemonium ensued; recriminations were thrown about; investors shouted, “No way, not right!”.
Is this a fair tactic? Should hedge funds be allowed to halt or gate redemptions? Let us refer to an age-old practice for some guidance. In the US, businesses are allowed to seek protection from their creditors in order to reorganise by filing for Chapter 11 in the bankruptcy protection code. Chapter 13 provides a similar reorganisation process for individuals.
