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Suspending NAV, Gating and Options for Funds Fearing a Rush of Redemptions in Light of the COVID-19 Pandemic

COVID-19 is having a widespread impact on markets and the global economy as businesses struggle with the disruption caused.  Falling asset values are likely to reduce the overall value of funds. Investors may seek to redeem their investments as they need to fulfill their own financial commitments and/or their confidence in the fund may reduce. This can lead to funds being unable to meet redemption requests in the usual way whilst still maintaining the value of the fund. This article discusses some of the options available to funds facing a run on redemptions.

Background

Hedge funds are collective investment vehicles, pooling money from investors and investing it according to a particular investment strategy or strategies. Most hedge funds are organised as two or three-tier structures (feeder funds and master funds) with the vehicles incorporated primarily in the Cayman Islands or the British Virgin Islands (sometimes with an onshore feeder fund). The investors enter through feeder funds, which channel funds into the master funds.

When the market crashes (as in 2008), or suffers losses, investors may seek to redeem their shares for a variety of reasons including: fulfilling their own financial commitments, cutting their losses, investing elsewhere and changing investment strategy. This can put immense pressure on the fund as it struggles to maintain value when experiencing a run of redemption requests. If investors redeem and are unpaid, as creditors they rank above the other investors, and the fund may face being wound up.

There are a range of options available to funds with their companies incorporated in the Cayman Islands. The first point to note is that the company’s articles will set out the basis on which it is permitted to redeem its shares and there are statutory limitations on the process. This article is not an exhaustive guide to every particular process, each company’s constitutional documents will have to be reviewed and the statutory rules applied. Urgent legal advice should be sought in all instances in which a fund faces a litany of redemption requests. Here we set out some options that have been commonly used by funds facing a rush of redemption requests.

 

To continue reading full articles in PDF format:
Suspending NAV, Gating and Options for Funds Fearing a Rush of Redemptions in Light of the COVID-19 Pandemic

 


Ben Hobden
Partner

Cayman Islands   +1 345 814 7366


Sarah McLennan
Associate

Cayman Islands   +1 345 814 7364


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