Managing Exceptional Circumstances In normal market conditions, redemptions will typically be effected as of the relevant dealing day and redemption proceeds calculated and paid in cash within a pre-agreed timeframe thereafter. However, the governing body of a fund (e.g., the board of directors) may conclude that it is no longer possible or fair to all investors to satisfy redemptions in accordance with normal arrangements. In reaching such a conclusion, the governing body must have due regard to the interests of continuing investors as well as those seeking to redeem their interests. The governing body may reach such a view where, for example: ^ due to liquidity concerns relating to the assets of the fund, it is not possible to easily realise those assets to provide cash to satisfy a redemption; ^ as a result of realising liquid assets to satisfy redemption proceeds, the proportion of the fund’s portfolio represented by less- liquid assets would rise to a level that is not compatible with the investment strategy of the fund, or would otherwise be unfair to continuing investors; ^ assets are likely to be realised at prices detrimental to investors (which may include both redeeming and continuing investors, depending on timing); ^ taking into account the legitimate cash requirements of the fund, the fund would be prevented from meeting its continuing obligations and maintaining a solvent position; or ^ the fund is subject to other events that may affect its ability to satisfy redemption requests (such as political or economic
“softer” lock-up provisions whereby investors may redeem their shares before the expiry of the relevant lock-up period subject to the deduction of a fee from the redemption proceeds payable to the fund and/or the manager. Frequency of Dealing Hedge funds pursuing a reasonably liquid investment strategy will generally be expected by investors to permit the regular subscription and redemption of interests in the fund. Many will offer monthly or quarterly dealing days and require investors to give the fund not less than 30, 45 or 60 days’ prior written notice of redemption requests. Subscriptions and redemptions tend to take effect as of specified dealing days on which banks in specified jurisdictions are open for business. AIFMD requires managers to ensure consistency between the investment strategy, liquidity profile and redemption policy. For less-liquid strategies, funds can impose more constrained dealing terms. Examples include: ^ longer notice periods and/or a reduction in the frequency of dealing days; ^ hard-lock provisions whereby investors are not permitted to redeem their interests for a specified “lock-up” period; ^ soft-lock provisions whereby investors that redeem interests within the specified “lock-up” period are permitted to redeem but pay an “early redemption” charge set at a rate designed to incentivise investors to hold their interests for the full “soft-lock” period (and may be used to compensate continuing investors for the impact that the early redemption has on the fund); and ^ gating or staged redemption provisions whereby investors submitting a redemption request have their interests realised over a number of dealing days, whereby the redemption of interests may be limited on a particular dealing day to a stated maximum (usually a percentage of an investor’s total holding in the fund (an investor-level gate), or the interests in issue or of the net asset value in the fund, or a particular class (a fund- or class-level gate)).
factors affecting its ability to trade in certain markets or to repatriate or transfer moneys).
If it is concluded that it is not appropriate to meet redemptions on a given dealing day in full on a cash basis, then the fund’s governing body should have in place sufficient liquidity management arrangements at its disposal to be able to manage the situation effectively and fairly. Such arrangements should be properly
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