Surviving large scale investor redemptions

As the Credit Crunch and the great leverage unwind continues some hedge funds are seeing double digit losses, large scale "sell" requests and the enforced blocking and postponement of those requests – known as the gating of redemptions. The last can be a major issue, often rousing the ire of investors to fever pitch. Gating has led to the closing of individual funds and hedge fund companies.

As a worst case scenario for a hedge fund it cannot get much tougher. A company in this position needs to tread very carefully in dealing with investors. If poorly handled, the situation can spiral out of control. In writing this, I speak from painfully acquired experience.

I cut my teeth in the hedge fund industry in 1996, and was around to witness the collapse of Long Term Capital Management in 1998. At the time I was working for a fund of hedge funds in a sales position. In a single month in 1998, we received "sell"/ redemption requests for a significant portion of our assets. This forced a very difficult decision. Should we meet the redemption requests by selling down our most liquid investments or consider the interests of the remaining shareholders in the fund and gate redemptions? The former would unbalance our portfolio at a time of very high market volatility. With our duty to remaining investors in mind, we chose the latter. The typical reaction from investors looking to sell was one of anger. Worse still, by enforcing a gate, other investors decided to redeem. Things were getting out of control.

A key was to keep the messages clear and eliminate jargon

We spent the last quarter of 1998 working hard on investor communication. Over several weeks we met with investors and distributors around the globe. We worked to ensure that they understood why the situation had arisen and why we had enforced gating. A key was to keep the messages clear and eliminate jargon. We also explained the outlook for hedge fund returns in 1999 (which was looking good) and why investors might wish to reconsider their selling requests. On return, we maintained regular, informative contact with our clients. This built an understanding and trust in what we were doing. A number of selling requests were withdrawn.

Over 1999 the situation was difficult, but the business’ survival seemed assured. Selling had largely stopped, and we were starting to see buyers. The communications policy had worked. Now we wanted to win new investors and engaged a PR adviser to help build our profile, support new product launches and help open new markets. Initially, we were sceptical that such PR would help. It helped greatly. For example, in raising assets from new prospects. This communications strategy undoubtedly helped the business step back into a new growth phase.

The lessons from this crisis situation can be summarised as:

• be proactive with clients and make the effort to meet them face to face
• be transparent and keep things simple – eliminate jargon
• communicate on a regular basis, and keep communications relevant
• use third party advisers such as PR agencies to help deal with media enquiries. They can develop profile raising strategies with you to support asset raising and retention.
• be prepared by having a media relations infrastructure already in place.

Communication to the marketplace is not the key to success for a hedge fund business. However, in good times and bad times, it can have a significant positive impact in investor retention and in raising assets.