A hedge fund can decide to suspend the redemption rights of investors, usually whenever it feels it is necessary, which means you won’t be able to get your money out until a later date. The hedge fund would be considered to be “gated” at this point.
Why would they do this? It is a provision in the offering memorandum that investors agree to (although let’s face it, not everyone reads the whole offering memorandum so it comes as a surprise if enacted). It is actually designed to protect the fund. If a hedge fund invests in illiquid securities and investors suddenly want their money back en masse, the fund may not be able to sell the assets it holds to fund the redemption requests. If the fund is the major holder of certain investments then there may also not be a ready buyer at the given moment, which would lead to an unfavourable sale price – which would hurt the investors making redemptions and the other investors as well. This could lead a manager to gate the fund for a certain period of time in order to protect the NAV of the fund as best as possible.
Hedge funds get a lot of bad press, but just as with any investment – you need to understand where you put your money. I am not against hedge funds – I’m against people/advisors who use hedge funds when they don’t know what they are doing. There is a whole spectrum of hedge funds from conservative to super aggressive. Remember to do your homework.
So Hedge funds will not have the run on the bank scene from It’s a Wonderful Life enacted on them? There are Mutual Funds that have rules about how much you can take out and when as well (with stiff penalties), but good point that if you really understand an investment and all it’s inherant “bug-a-boos”, then you should be ok.
“I am not against hedge funds – I’m against people/advisors who use hedge funds when they don’t know what they are doing.”
Amen brother.
But people are lazy and invest when someone gives them advice.
This is a big area where financial planners can do their customers a good service, rather than concentrating on their own fees. They could do due diligence before making hedge (or other) fund recommendations.