Redemption Suspension
What Is a Redemption Suspension?
A redemption suspension is an impermanent measure by which investors in a fund can't pull out, or "reclaim," the capital they invested in the fund. The term is for the most part associated with hedge funds, which frequently reserve the right to impose redemption suspensions under certain rare conditions.
Regularly, hedge fund managers impose redemption suspensions when they are worried about the possibility that that a curiously high volume of redemption solicitations might compromise the liquidity or solvency of the fund. Notwithstanding, causing so can harm investor confidence and generally brings about increased redemptions once the redemption suspension is lifted.
Grasping Redemption Suspensions
The decision of whether to impose a redemption suspension is made by hedge fund managers alongside their trustees. This decision ought not be trifled with, as it is generally disliked by investors and is seen as an indication of poor management rehearses.
The specific cycle for dealing with redemptions will rely upon the terms and conditions set forward by the investment fund. Be that as it may, all funds are required to illuminate regulators and investors when a redemption suspension period has been imposed and to keep those gatherings educated regarding new improvements as long as necessary. Besides, hedge funds are required to put forth reasonable attempts to lift the suspension as soon as could really be expected.
Normally, redemption suspensions are rare occasions which are reserved for extraordinary conditions. To be considered tenable by investors and regulators, these conditions ought to influence the markets overall rather than being specific to the individual fund. For example, the 2007-2008 financial crisis saw a spike in redemption suspensions by hedge funds, which is justifiable to the extent that that period included a rare and extreme credit crunch that impacted the liquidity of hedge funds and other investment vehicles.
Different occasions which could cause hedge funds to impose a redemption suspension incorporate natural debacles and corporate actions, like a proposed fund merger or reorganization. Such transactions can be complex and can bring about increased demand for redemptions. The takeoff of key staff, for example, a star fund manager, can likewise influence investor sentiment and brief a rise in redemptions.
Real World Example of a Redemption Suspension
In Aug. 2018, the Swiss investment firm GAM Holding (GMHLY) imposed a redemption suspension after their star manager was suspended by regulators. The impacted fund, which was seeking after a absolute-return strategy in the bond market, was hit with higher than anticipated redemption demands following insight about the suspension.
This decision, which was approved by the fund's board of directors, was made following a period of time in which investors mentioned for over 10% of its assets under management (AUM) to be reclaimed. In supporting their decision, that's what the company contended permitting this high volume of redemption to happen would have negatively affected the excess investors by lessening the liquidity of the overall portfolio below acceptable levels.
In a transition to reduce the reaction from investors, GAM Holding carried out a brief halt to all management fees however long the suspension might last.
Highlights
- A redemption suspension is an impermanent halt to the ability of investors to pull out capital from an investment fund.
- At times, redemption suspensions are likewise used to oversee fund-specific crises, for example, the loss of a star fund manager.
- It is normally imposed in response to a crisis, for example, a serious credit crunch.
