The Hedge Fund Redemption

Alex Potts • Posted 30/04/2009 • Under Articles

CAN A HEDGE FUND MAKE REDEMPTION PAYMENTS 'IN KIND' BY WAY OF THE ISSUE OF 'PARTICIPATION INTERESTS' IN ITS OWN ILLIQUID ASSETS, AND WHAT IS THE STATUS OF A REDEEMING INVESTOR WHO HAS NOT RECEIVED ANY PAYMENT AT ALL?

In the current economic climate, hedge funds face substantial challenges from investors demanding the return of their capital, at a time when assets are illiquid or difficult to value, and there is not enough cash to go round.

A recent judgment of the Supreme Court of Bermuda addressed certain critical issues relating to the satisfaction of a hedge fund's redemption obligations by way of payments 'in kind' to investors, as well as the status of a redeeming investor and the remedies potentially available to him in the event of non-payment.

The Court also considered whether it was open to a hedge fund to restate its NAV retrospectively in the event of a fraud, as well as whether it was an abuse of process for a redeeming investor to petition for the winding up of the hedge fund.

The ruling potentially has wider implications, both legal and commercial, to hedge funds incorporated in Bermuda, the Cayman Islands and the British Virgin Islands, and other offshore jurisdictions. This article is of interest to funds and financial services lawyers, as well as dispute resolution and insolvency lawyers generally. It should also be of interest to hedge fund managers, directors, service providers and investors.