Exit Strategies: Questions About Hedge Fund Redemptions.

The recent poor performance of hedge funds has many investors curious about their ability to withdraw assets from under-performing hedge funds. Only the lack of regulation and wide variety of redemption polices has some investors confused. Fund managers also sometimes face the difficult task of selling somewhat illiquid assets to meet investor redemptions.

Unlike mutual funds which are governed by the SEC including the Securities Act of 1933, the Investment Company Act of 1940, the Securities Exchange Act of 1934 and the Investment Advisers Act. Hedge funds are usually not required to be SEC registered though the managers do have certain fiduciary duties.

Some of the common hedge fund redemption provisions include a "lock up" period, typically of 1-4 years, in which redemptions are not permitted except with manager consent. Some funds have a "gate" which limits the total amount of redemptions the fund will pay at any redemption period, maybe 20% of total assets. Hedge fund managers may also take reserves to pay for future liabilities. Lastlyhedge funds differ in the frequency of withdrawal periods.

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