Hedge Fund-of-Funds Used to Stave Off Investor Redemptions
A hedge fund-of-funds sponsor agreed to an industry bar and fines and penalties for using the fund-of-funds to satisfy redemption requests for an illiquid underlying fund. According to the SEC, the underlying fund suffered liquidity issues as a result of its investments. Rather than suspend redemptions, the fund sponsor invested assets from the fund-of-funds to satisfy redeeming shareholders. The SEC also charges that the firm never disclosed its liquidity problems and marketed the hedge fund-of-funds as a conservative investment.
OUR TAKE: Don’t compound a business problem – liquidity issues due to a falling market – with regulatory violations. Investors may forgive a bad call, but they generally won’t forgive regulatory problems.