Hedge funds offer a great opportunity for aggressive investors looking to land a big payday. Today, the industry is better regulated than it has ever been. And, with the rise in competition, fees are lower than ever before. But, all good things must come to an end. If you’ve ever thought about the process of exiting a hedge fund, this post covers the essential strategies to help you transition from your investment.
The Importance of a Hedge Fund Exit Strategy Plan
By the time most investors are seriously thinking about terminating their investment, it is already too late. A hedge fund exit strategy plan is precisely what it sounds like. It is simply a contingency plan for an investor to liquidate their position in a hedge fund. So, the best time to come up with your exit strategy is before you even choose a hedge fund to invest in.
For the most part, hedge funds enjoy low regulatory supervision compared to most other investment vehicles. This setup sets the stage for the ideal high-risk, high-reward scenario that makes these investment vehicles particularly lucrative for fund managers and investors alike. But, conversely, the relatively low regulation also means fewer protections for investors.
Therefore, an exit strategy plan is crucial from a shrewd investor’s perspective. For example, a hedge fund may opt to invest in illiquid assets or primarily use leveraged investing. These types of investments are often complex, requiring a keen eye and solid understanding on the part of the investor. A sound exit plan can inform the investor of the right time to sell their hedge fund holdings.
Similarly, an exit strategy can help you minimize risk and maximize profits. These qualities are crucial for your mental and emotional wellbeing, despite the market conditions. Additionally, an exit strategy will help you identify when you’ve met your investment objectives. At the very least, you’ll want to re-evaluate your portfolio or get out entirely.
4 Exit Strategies for Hedge Fund Investors
Whatever your reasons for having an exit strategy, it is difficult to overstate the importance of having one. Here are a few common exit strategies for hedge fund investors explained.
1. Find Out About Lock-Ups
Again, having an exit strategy in mind before choosing a hedge fund is a good idea. This way, you can use the nature of a fund’s lock-up to determine whether it is a worthwhile investment. Lock-ups refer to the period an investor must hold on to their shares before redeeming them. Usually, this lock-up lasts between one and three years.
There are also two types of lock-ups. A hard lock-up means almost no way to redeem your capital until the lock-up period expires. On the other hand, a soft lock-up means that you can redeem your capital before this timeframe expires. But, you’ll need to pay a fine for early redemption.
If you’re already locked into a hedge fund, you can look over your agreement documents to learn about the restrictions. Unfortunately, there isn’t much you can do in the case of a hard lock-up except wait for the period to expire. You can also weigh your options with the soft lock-up and determine whether paying the fine is worth it.
However, in some cases, the fund’s directors may have the power to waive this lock-up. So, it is worth pursuing this route, just in case you may be able to get out of a hard lock-up.
2. File Your Redemption Notice on Time
Typically, hedge funds require investors to file a formal notice before redeeming their shares. The notice period can vary anywhere between 30 days to one year. In addition, most hedge funds have a specific redemption date.
For example, say your fund’s redemption date is June 30. If your redemption notice period is 30 days, you’ll need to submit your notice at least 30 days before June 30 (by May 31). Failure to submit your notice on time often means that the redemption will roll over to the next nearest redemption date.
Equally, there might be limits to how much you can withdraw on the redemption date. This limit is referred to as a “gate” and is especially common in times of severe market stress. For example, your hedge fund may limit your withdrawal to only 15% of your capital. In this case, a full exit can be a drawn-out process, depending on the number of redemption days in a calendar year.
3. Consider Selling Your Investment Privately
This option is usually up to the discretion of the specific hedge fund. But, it may be possible to sell your investment privately to a willing buyer. In this case, you’d be able to make a clean break and avoid much of the bureaucracy around withdrawing your capital.
It is worth mentioning that this bureaucracy is mostly in the interest of the remaining investors. For example, the fund may need to liquidate substantial assets to fund a large withdrawal. In this case, the firm’s portfolio will be primarily made up of illiquid assets. This situation can affect the remaining investor’s short-term gains.
Either way, hedge fund managers may be willing to facilitate selling your investment. This is especially true if many investors are looking to join the fund. You may even be able to bypass the lock-up period since the buyer facilitates the payout. So again, it is worth speaking to your fund manager about the possibility of selling your investment privately.
Multi-asset platforms like MetaTrader 5 for hedge funds make it easy to communicate with your fund manager directly. You’ll even be able to monitor your investment in real-time, withdraw your money, and generate reports right from the platform once everything is cleared up.
4. Calculate the True Cost of the Exit
Simply looking at your capital investment and gains doesn’t paint the complete picture of recouping your investment. Other cost factors include exit fees, management fees, losses, and additional potential fees. Speak to your fund manager about exactly how much to expect to earn once you’ve completed the exit process.