Hedge Funds Suspend Withdrawals

Investors are obviously frustrated and angered when Hedge Funds Suspend Withdrawals. There have been several articles discussing this subject and the Hedge Funds declaring suspension of asset withdrawals have been significant in numbers and size, with respect to the aggregate amount of assets under management.

The first question that needs to be answered is whether or not the offering documents or limited partnership agreement allow a situation when hedge funds suspend withdrawals. Many fund documents provide that investors must give at least 45 days advance written notice prior to the end of the year in order for the investor to be able to withdraw or redeem in whole or in part.

This 45 day advance notice serves as important purpose. First, it gives the fund manager sufficient advance notice of which investors are withdrawing and how much investment capital is being withdrawn. This allows for a more orderly system of withdrawals and should actually protect those investors that are not withdrawing, since it gives the fund manager time to sell off positions or liquidate assets as the case may be.

Many fund documents also provide that the fund manager is to send 75% of the redemption amount to the investor within 60 calendar days following the first of the year. The balance of 25% is to be sent to the investor within thirty (30) calendar days after the annual audit is done.

What complicates the matter, however, is that there are numerous variations in the terms and conditions set forth in a hedge funds offering documents. For instance, one common clause I have used in documents drafted for my clients states,“The Investment Manager shall not be required to liquidate positions in order to meet withdrawals of the limited partners.”

This clause actually protects all the limited partners in the fund, since assets or positions that must be quickly sold in a perceived “fire sale” will greatly reduce the funds return and hurt withdrawing as well as non-withdrawing limited partners.

The problem when hedge funds suspend withdrawals, however, is whether the offering documents allow a fund manager to blatantly issue a unilateral decision to suspend all withdrawals and redemptions by investors. It would seem that these large multi-billion dollar funds, that have become a Hedge Fund Armada, may simply be trying to preserve their assets under management. When a fund manager makes a 2% management fee on a billion dollars, that is twenty million for management, but the manager keeps whatever is not spent on salaries, infrastructure, rent, etc.

Sandra Manzke, a recognized hedge fund investor who founded Tremont Capital Management, Inc. is in the process of forming Hedge Fund Investors United Forum (“HFIUF”) to protect the rights of hedge fund investors. (Source: Katherine Burton, Bloomberg News)

Time will tell whether or not the HFIUF will attract enough attention to launch and have enough momentum to keep it going. With the several hedge fund associations that seem to have been formed over the last few years it is no wonder that someone didn’t think of forming some sort of investors’ forum or association as well.

With the number of pension funds and institutional investors out there that have been affected by the Lehman Prime Brokerage fiasco and hedge funds suspending withdrawals, there probably has never been a better time for such an organization to launch.