Offshore: Decreasing the distress
When the happy couple is getting ready to walk down the aisle, any suggestion by one party that the other should sign a pre-nuptial agreement is usually enough to pour cold water on the romance and derail any hope of holy matrimony. Just as the unsuspecting bride and groom are unlikely to spend much time mulling over the potential pitfalls of their union, little thought tends to be given to the possibility of future problems with a fund when it is launched.The start of a fund's life, however, is the most appropriate time for these delicate subjects to be broached. The fallout from the credit crisis and its impact on certain hedge funds has underlined the importance of ensuring that funds are appropriately structured in order to improve their position in the event of a liquidity crisis. The simultaneous withdrawal of only a few investors with large holdings in a particular hedge fund can quickly cause it to go into distress. Add into the mix the inability of the fund to sell assets at a reasonable price, and the resultant run on redemptions could threaten the fund's very existence. The variety of potential liquidity problems has been compounded by funds' inability to borrow at rates previously anticipated, leaving the usual strategies for survival in shreds. Investors are short of cash and, as greater numbers seek to redeem, there are some tough options on the table.
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