As an alternative, the fund is offering investors the opportunity to move to a new class of shares that will not have a gate, say the reports.
Calls to Paragon were not returned.
It’s not a new strategy. Ritchie Capital tried to apply a move to a new class of shares to slow its redemptions and appease investors when it was facing substantial losses in some of its funds. "Polygon might well not be in the dire straits that Ritchie Capital was in but changes in redemption strategy on the back of even small losses cause panic among investors, and create a vicious cycle of mass redemptions, forced liquidation of assets, losses, and then further redemptions," says a hedge fund consultant in New York.
This raises the question, what can be done to manage redemptions in a market where investors are nervous? More than 30 hedge funds have stopped investor withdrawals since last November, and although it is a means of reducing fire sales of assets and obtaining the most value for investors, it is viewed by many as simply a prolongation of a fund’s life. Lawsuits are increasing, say lawyers. In April, the $1 billion mortgage-backed securities hedge fund Carrington Investment Partners was sued by an investor who was unable to remove his money.
Lawyers say that investors have little clout in court, however, as, more often than not, the small print in the investment contract will include provisions for managers to take action to reduce redemptions if it is better for the majority of investors.
Side-pockets
There are means of addressing redemption outflows says Michael Serota, US asset management tax leader at Ernst & Young. "With investments that have become illiquid, it may be time to review whether or not these should be put into side-pockets. But only if this does not favour one group of investors over another. Reviewing valuation policies regularly to make sure they are appropriate can help identify investments that may need to be side-pocketed."
Above all, says Serota, a constant dialogue with investors about valuations and investments and changes in structure and redemptions goes a long way to easing investors’ minds. "Panic is unfortunate, but with good communication it can hopefully be avoided."
Richard Wilson, a hedge fund consultant and founder of the Hedge Fund Group, a network of managers and professionals, agrees that transparency is one of the key ways in which irrational redemptions can be reduced. "Some hedge funds invest more heavily in investor relations to prevent mass redemptions during tough times," he says. "More transparent funds with good business and portfolio-based risk controls which operate with enough transparency will fare better than their competitors during turbulent market cycles. An experienced IR person really is worth their weight in gold within a large hedge fund with multiple products."
A New York headhunter says several large hedge funds have recruited investor relations staff to take on precisely this role. "Adding a dedicated pair of hands that can be on call for investors and who can relay potential changes to redemption structures, and evaluate investor opinion is being more crucial in this environment," he says.