Phuket Business: When the financial gate slams shut

PHUKET: Since I’m often writing about how I like alternative investment strategies, it may be a good idea to do a few pieces on the features of funds available to managers when they open.

This will help you understand what can happen when you invest in such a fund. This week is about gates – since most alternative funds write the option to put up a gate into their offer memorandums.

A gate is the ability to suspend redemptions if a certain percentage of the assets in a fund are redeemed at the same time. While this sounds like a bad thing, it can actually help save a fund and protect its remaining investors.

If a fund has illiquid assets and needs to dump them quickly, everyone loses. A gate is a way to prevent this from happening. Unfortunately, if you need to access proceeds from a sale and the fund puts up a gate, it might be some time before you get your cash.

If you’re looking at buying an alternative fund with illiquid assets, know that if there is a run a gate will likely be put up. I advise people to stay in funds where the underlying assets are exchange traded and can be liquidated quickly.

This way, a gate should never be a problem. However, some funds with illiquid underlying assets do provide extra diversification.

If you find yourself in a position where your fund has put a gate up, my personal opinion is to get your money back as soon as it becomes available again. Some would argue that if a gate is opened and lowered it means that the fund used it properly to protect the interests of remaining investors, and is therefore still a solid company.

I think that if there is a whiff of trouble with any investment you should get out as soon as possible. Whenever I’ve delayed acting on this instinct, my clients have suffered for it. Thus, I’m not going to delay getting out if a gate is lowered.

Many of the best fund managers in the world have lowering a gate as an option, so I don’t think it is good advice to avoid funds if you see they have it written into their offering
memorandum.

Just make sure you know what could happen in a moment of panic if the markets cause liquidity to drop and money to flow out of risk assets. This phenomenon might lead to a fund lowering its gates.

Make sure you know which fund assets would be easily disposed of and think of those holdings as likely to be true to the liquidity terms you read about on the fund fact sheet.

David Mayes MBA lives in Phuket and provides wealth management services to expatriates around the globe, specializing in UK pension transfers. He can be reached at 085-335-8573 or david.m@faramond.com.

— David Mayes