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US Outlook: Legal Limits on Hedge Fund Redemption Gates and Suspensions

Firm Memoranda

Investors in hedge funds often face several restrictions on their ability to withdraw capital from the fund. These liquidity restrictions have definite benefits, allowing hedge funds to maintain long-term investment strategies, qualify for exemptions from regulatory requirements, and avoid the higher taxes associated with a publicly traded partnership. Liquidity management tools assumed increased importance in the wake of the 2008 financial crisis, as hedge funds faced a flood of redemption requests and few new subscriptions. The economic downturn that has accompanied the recent advent of the global COVID-19 pandemic is likely to bring liquidity issues to the forefront once again. At least one fund has already restricted redemption and begun dissolution, citing an unexpected wave of redemption requests and difficulty raising new capital. Hedge fund managers and investors alike will need to be aware of liquidity management issues and the legal limits on the use of liquidity restrictions.

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Andrew Rossman
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