Run on the Fund
Contents
Understanding Run on the Fund: Causes, Consequences, and Case Studies
Exploring the concept of a run on the fund unveils the complexities of investor behavior and market dynamics, especially in the realm of hedge funds and pooled investments. This article delves into the intricacies of runs on the fund, shedding light on their causes, consequences, and real-life examples.
Deciphering Run on the Fund
A run on the fund occurs when investors rush to redeem their investments from a pooled vehicle, such as a hedge fund, triggering a cascade of redemptions. This phenomenon is typically spurred by poor performance, prompting investors to seek the return of their capital, which, in turn, exacerbates the fund's troubles and may lead to its closure.
Understanding the Dynamics
As redemptions mount, fund managers are compelled to sell assets to meet investor requests, often at unfavorable prices, particularly in bear markets. This forced selling exerts downward pressure on the fund's performance, fueling further redemptions and creating a destructive feedback loop that can culminate in the fund's demise.
Case Studies: Peloton Partners and the Reserve Primary Fund
Examining historical instances of runs on the fund provides valuable insights into their impact. Peloton Partners' experience with its mortgage-backed hedge fund in 2008 and the Reserve Primary Fund's run following Lehman Brothers' collapse offer poignant examples of the havoc wreaked by investor panic and fund illiquidity.