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Redemptions: Is there a cure for redemption fever?

According to press reports, Polygon Investment Partners, an $8 billion UK hedge fund, is changing its redemption system in a bid to slow investor withdrawals. The fund, which had lost 4% by the end of March, operates a first-come, first-served redemption system that limits the amount of withdrawals at any particular time. But management reportedly claims that this has resulted in investors applying to withdraw money in a bid to be first out of the gate, simply to avoid being caught last if the fund were to get into serious trouble.

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.

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