Redemption Suspension Explained (2025): How It Works & Real Example
Discover what a redemption suspension is, why hedge funds use it, and how it impacts investors. Learn from a real case of redemption suspension in 2018 and understand its significance in today's financial markets.
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What Is a Redemption Suspension in 2024?
A redemption suspension is a temporary freeze that prevents investors from withdrawing or "redeeming" their invested capital in a fund. This mechanism is most commonly associated with hedge funds, which reserve the right to enact suspensions under exceptional conditions.
Fund managers typically activate redemption suspensions when an overwhelming surge of redemption requests threatens the fund's liquidity or solvency. While this protects the fund’s stability, it can erode investor confidence and often leads to a spike in redemption requests once the suspension ends.
Key Points to Remember
- A redemption suspension temporarily blocks investors from withdrawing funds.
- It is usually triggered by financial crises or extraordinary market conditions.
- Sometimes, specific internal events—like the departure of a key fund manager—can also prompt suspensions.
How Redemption Suspensions Operate
The decision to impose a redemption suspension is made by hedge fund managers in collaboration with trustees. This measure is considered a last resort and is generally viewed unfavorably by investors, signaling potential management challenges.
Procedures vary based on the fund’s governing documents, but funds must notify regulators and investors immediately upon imposing a suspension and provide ongoing updates throughout the suspension period. Hedge funds are obligated to lift the suspension as swiftly as possible.
Redemption suspensions are rare and typically reserved for widespread market disruptions rather than fund-specific issues. For example, during the 2007–2008 financial crisis, many hedge funds enacted suspensions due to the severe credit crunch affecting market liquidity.
Other triggers include natural disasters, significant corporate actions like mergers or restructurings, or the loss of influential personnel such as star fund managers, all of which can increase redemption pressure.
Case Study: GAM Holding Redemption Suspension in 2018
In August 2018, Swiss investment firm GAM Holding (GMHLY) implemented a redemption suspension after regulators suspended its star fund manager. The affected bond market absolute-return fund faced unexpectedly high redemption requests following this news.
The fund’s board approved the suspension after investors sought to redeem over 10% of assets under management (AUM). GAM Holding argued that allowing such large redemptions would have jeopardized remaining investors by severely reducing portfolio liquidity.
To mitigate investor dissatisfaction, GAM Holding temporarily waived all management fees during the suspension period.
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