Sub-prime woes in the US

[Markjbloggs]

Bear Sterns says the 2 funds it had invested in sub-prime backed mortgages are essentially worthless -

http://www.reuters.com/article/topNews/idUKN1726029320070717?rpc=44

That is bad enough, but they go on to say that once the extent of the problem became clear, they halted redemptions from these funds.

My question is - in general, can such a scenario happen here? Can a fund management company prevent an investor from exiting a fund if it appears as though the it is in trouble?

 

[room305]

Hedge funds often have such restrictions. They are highly leveraged vehicles and a rash of withdrawals will lead to liquidity problems and margin calls.

 

[CCOVICH]

My question is - in general, can such a scenario happen here? Can a fund management company prevent an investor from exiting a fund if it appears as though the it is in trouble?

Or they could apply a pricing adjustment to leave your stake at zero.

 

[Markjbloggs]

Holy moly, that is scary. What conditions typically would trigger this? Is it based on a % drop in the fund value? Can it be anticipated by an observant investor?

 

[Hedger]

A hedge fund cannot prevent redemptions if the investor is entitled to redeem. However, in most subscription documents investors agree not to redeem for anything up to a year. Also, a lot of funds will apply a gate where they are entitled to restrict redemptions to a certain percentage of the net asset value to maintain liquidity.

 

[Howitzer]

What many people may not be aware of is that a disproportionate amount of the Financial Services based out of the Ireland in general, and the IFSC in particular, are based either directly or indirectly (auditing, etc) around these Hedge Funds.

[broken link removed]

And much like the dot com boom many "start up" hedge funds have starting springing up in Ireland, created by people who would have gained their initial experience within big multinational financial services companies based here. This industry is currently seeing talent being spread very thinly and average performers looking for extortionate wages. A great industry to have when things are going well.

 

[room305]

Holy moly, that is scary. What conditions typically would trigger this? Is it based on a % drop in the fund value? Can it be anticipated by an observant investor?

I presume it varies from fund to fund and you would have to go back and check the small print if you are invested in one. I don't think it's anything to do with percentage losses, the fund could be up but investors still prevented from redeeming. However, it usually only becomes an issue when a fund suffers a large loss as most investors want to get whatever is left back out before there are further margin calls and losses.