What Is a Redemption Suspension?
A redemption suspension is a temporary measure whereby investors in a fund are unable to withdraw, or "redeem," the capital they invested in the fund. The term is mostly associated with hedge funds, which often reserve the right to impose redemption suspensions under certain rare circumstances.
Typically, hedge fund managers impose redemption suspensions when they are afraid that an unusually high volume of redemption requests may threaten the liquidity or solvency of the fund. However, doing so can damage investor confidence and generally results in increased redemptions once the redemption suspension is lifted.
- A redemption suspension is a temporary halt to the ability of investors to withdraw capital from an investment fund.
- It is typically imposed in response to a crisis, such as a severe credit crunch.
- Occasionally, redemption suspensions are also used to manage fund-specific crises, such as the loss of a star fund manager.
Understanding Redemption Suspensions
The decision of whether to impose a redemption suspension is made by hedge fund managers along with their trustees. This decision should not be taken lightly, as it is generally frowned upon by investors and is viewed as a sign of poor management practices.
The exact process for handling redemptions will depend on the terms and conditions set forth by the investment fund. However, all funds are required to inform regulators and investors when a redemption suspension period has been imposed and to keep those parties informed of new developments for the duration of the suspension. Moreover, hedge funds are required to make reasonable efforts to lift the suspension as early as possible.
Typically, redemption suspensions are rare events which are reserved for extraordinary circumstances. In order to be deemed credible by investors and regulators, these circumstances should affect the markets in general as opposed to being specific to the individual fund. For instance, the 2007–2008 financial crisis saw a spike in redemption suspensions by hedge funds, which is understandable insofar as that period did involve a rare and severe credit crunch that affected the liquidity of hedge funds and other investment vehicles.
Other events which could cause hedge funds to impose a redemption suspension include natural disasters and corporate actions, such as a proposed fund merger or reorganization. Such transactions can be complex and can result in increased demand for redemptions. The departure of key personnel, such as a star fund manager, can also affect investor sentiment and prompt 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 affected fund, which was pursuing an absolute-return strategy in the bond market, was struck with higher than anticipated redemption requests following news of the suspension.
This decision, which was approved by the fund's board of directors, was made following a period of time in which investors requested for more than 10% of its assets under management (AUM) to be redeemed. In supporting their decision, the company argued that allowing this high volume of redemption to occur would have negatively impacted the remaining investors by reducing the liquidity of the overall portfolio below acceptable levels.
In a move to reduce the backlash from investors, GAM Holding implemented a temporary halt to all management fees for the duration of the suspension.