WHAT IS Redemption Suspension
A redemption suspension is a hedge fund provision that prevents withdrawal from the fund during a specified period, or when the fund is unable to meet redemption demands. The fund managers can implement a suspension at any time, depending on the terms of the hedge fund, which should be outlined in its prospectus.
BREAKING DOWN Redemption Suspension
A redemption suspension is a negative event for a hedge fund and typically reserved for extreme situations. The hedge fund’s managers and the trustees have to look for other options before implementing a suspension, and all must agree that suspending redemptions is the best course of action, both for investors and the fund overall. Such an event reflects poorly on the fund’s management team and its operating practices.
This kind of suspension generally has a negative effect on investor sentiment in the hedge fund and a loss of trust. Once lifted, it is common to see a spike in redemption requests as investor lose trust in the fund.
Typically, redemption includes paying back the principal amount and can be at par or at the original value depending on the terms and conditions set forth by the individual fund. Terms and conditions can vary from fund to fund. The fund must inform regulators and investors about the suspension and keep the parties abreast of developments for however long the suspension lasts. By rule, the fund must make every attempt to lift the suspension as soon as possible.
Redemption Suspension Events
Redemption suspensions are rare. Typically, they are reserved for extraordinary situations that affect the broader economy and call into question how events could compromise the health of the financial markets overall. For example, the global financial crisis has had a significant effect on hedge funds. Market uncertainty led many investors to redeem their holdings in a flight to safety. The depth of the financial crisis caused many hedge funds to either suspend or restrict redemptions.
Other events that could cause a hedge fund to determine that a redemption suspension is appropriate include natural disasters that cause the financial markets to cease trading activity. Fund managers and trustees may also implement a suspension amid fund mergers, which can be complex and lead to increased demands for redemption. The departures of key personnel that receives negative investor attention may also be the cause of a suspension, especially if particularly influential trustees step aside from fund decision making.