Investors face losses as hedge funds 'block the exits'

12 December 2008

Hedge fund investors could lose up to 15 per cent of their original outlay trying to redeem their money from the investment pools as fund managers attempt to block damaging withdrawals, a new academic paper has claimed.

The study, reported by Reuters, said hedge funds have traditionally applied restrictions on when investors can take their money out but in the face of the deepening financial crisis and spiralling redemptions, many are now trying to slam the exits completely.

Previously, hedge funds had been wary about refusing to sanction withdrawals as it could be seen as a sign of impending failure but with $40 billion pulled from the global industry in October alone, managers are becoming less apprehensive about trying to apply the brakes.

In an interview with the news service, the paper's co-author Professor Nicolas Bollen of Vanderbilt University in Nashville, Tennessee said the invocation of a fund manager's right to block withdrawal requests "generates an implied cost of between 5 percent and 15 percent of the initial investment".

With the commitment threshold for many hedge funds standing at $1 million, this could cost investors up to $150,000, Reuters noted.

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