Suspensions

Hedge fund managers need a way to protect their funds during market crises. One of the most important tools they have is the authority to temporarily stop investors from withdrawing their money—known as a redemption suspension. This power is typically given to the investment manager, , or and should be included in every hedge fund's governing documents.

When investors want to pull their money out of a fund during a market crisis, the fund manager might be forced to sell investments at terrible prices just to raise cash. This hurts everyone who stays in the fund. A redemption suspension prevents this problem by temporarily freezing all withdrawals until conditions improve.

The rules about when managers can use this power have changed over time. Older funds usually limited suspensions to clear market disruptions, like when stock exchanges shut down. Today's funds give managers more flexibility. They can now suspend redemptions whenever it would be difficult to properly value the fund's investments or when selling assets would harm the investors who choose to stay.

Investors often worry when a fund announces a suspension, but experienced market participants generally understand the reasoning. Suspensions ensure that all investors receive fair treatment and prevent the fund from selling portfolio investments at unfavorable prices under emergency conditions.

Without suspensions, a fund might face a situation where some investors withdraw their money by forcing asset sales at fire-sale prices, while remaining investors bear the losses from those poor sale prices. The suspension mechanism prevents this unfair outcome.

Hedge fund documents typically allow investment managers to suspend redemptions in several specific situations. First, they can suspend when stock exchanges or are closed or restricted beyond normal holidays and weekends. Second, they can suspend when communication systems fail and the fund cannot accurately determine what its assets are worth. Third, they can suspend when the fund cannot transfer money at normal exchange rates or when the fund has announced it will shut down.

Many investment managers also include the right to suspend redemptions when paying out withdrawals would violate loan agreements or cause the fund to default on its borrowing. While this situation might be covered under broader language about protecting remaining investors, spelling it out clearly helps investors understand what might trigger a suspension.

Hedge fund documents generally also give investment managers and boards the ability to suspend the calculation of the fund's net asset value (NAV). While this often occurs alongside redemption suspensions, NAV suspension represents a separate mechanism. Managers can suspend NAV calculations independently of redemption suspensions when they cannot accurately determine what the fund's investments are worth.

Investment managers often keep the right to delay payment of redemption proceeds while treating the redemption request itself differently. Under this approach, the fund calculates exactly how much money an investor is owed as of their redemption date. The investor stops participating in any future gains or losses from that date forward. However, the actual cash payment is delayed until the suspension circumstances end.

When suspension conditions occur, investors receive formal notification from the investment manager. The manager typically cancels any pending redemption requests automatically, and will not process any new withdrawal requests until conditions return to normal. Once the manager determines that the problems have been resolved, they notify investors and announce when redemption requests will resume.

During a suspension period, the investment manager usually continues collecting and according to the fund's governing documents. However, when a redemption suspension occurs alongside a planned that is expected to last several years, the manager may choose to reduce or eliminate management fees.

These fee reductions typically serve as a concession to frustrated investors. They also reflect the reality that the manager may have shifted resources away from ongoing fund management activities, including research for new investments.

The timing of suspension creates different outcomes for different investors. Investors whose redemption requests are still pending when suspension begins continue to own their fund positions. They remain exposed to any gains or losses that occur during the suspension period.

By contrast, investors who submitted redemption requests before the suspension but have not yet received payment become creditors of the fund. Their redemption amount is locked in at the value from their original withdrawal date. They do not participate in any fund performance that occurs after their redemption date.

This timing difference creates meaningful economic consequences. Some investors may benefit or suffer based purely on when they submitted their requests relative to when the suspension was imposed.

should recognize that long suspension periods may create problems when the suspension finally ends. Investors who were blocked from withdrawing often submit redemption requests as soon as they can. This flood of withdrawal requests could threaten the fund's ability to continue operating, potentially forcing liquidation even after the original problems have been resolved.