Run on the Fund

What Is a Run on the Fund?

A run on the fund is a situation wherein a hedge fund, or other asset pool, faces a developing number of requests for redemptions from investors. A run on the fund might occur in light of multiple factors, however is typically the consequence of poor performance of underlying assets. This poor performance spurs investors to request the return of their money, which thus makes the fund exit its positions, leading to even more awful performance and more redemptions, generally leading the hedge fund to ultimately close down.

A run on the fund can measure up to a bank run, where contributors run to pull out their deposits at the same time, making the bank run short of cash and eventually collapse.

Figuring out Runs on the Fund

A run on the fund gains momentum as fund managers are forced to sell assets to meet redemption requests. These forced sales frequently negatively influence the performance of the fund, particularly during a bear market. As the market falls, fund managers need to sell assets to raise the essential cash, and frequently must sell at a loss. As redemptions further push down the fund's performance, more investors become terrified and request redemptions, causing a negative feedback loop that by and large can force the fund to close.

Many hedge funds safeguard against runs by permitting managers to suspend the investors' ability to reclaim for a period. Before the 2008 financial crisis, such suspensions were very rare, as they indicated to investors that the fund was battling and may even be forced to close. However, during the crisis, some large, popular hedge funds, similar to hedge fund pioneer Paul Tudor Jones' BVI Global Fund, suspended redemptions to prevent a run on the fund.

Illustration of a Run on the Fund

Peloton Partners experienced a classic run on its $1.8 billion mortgage-backed hedge fund in 2008, after the crash in U.S. real estate prices seriously harmed Peloton's performance. Peloton bet against the subprime real estate market and invested vigorously in higher-grade mortgages, which empowered it to earn a 87% return. However, even Peloton's higher-grade investments started to sour as the crash proceeded.

The firm suspended redemptions to prevent investors from escaping as once huge mob, however these measures were pretty much nothing, too late. Peloton announced in February 2008 that it was closing its mortgage-backed fund.

A run on the fund isn't just limited to hedge funds. In 2008, a noticeable money market mutual fund called the Reserve Primary Fund experienced a run as the consequence of its investment in the short-term debt of the failed investment bank Lehman Brothers. However the fund kept just a small portion of its investments in Lehman debt, frightened investors pulled out almost 66% of the fund's total assets under management not long after the collapse. However the fund suspended redemptions, forestalling its ultimate failure was sufficiently not.

Features

• Frequently set off by poor performance, a run on the fund intensifies issues by compelling fund managers to exit positions at progressively unfavorable prices, and instigating even more redemptions.
• A run on the fund is when investors in a pooled investment, for example, a hedge fund out of nowhere and at the same time request their money back through redemptions.
• Ultimately, a run on the fund can cause a hedge fund to close down and leave business.