Lesson 11 of 25 · 7 min

Credit funds, 2008 and 2009: gates, side pockets and suspensions

A gate does not stop a loss; it converts a liquidity problem into a wait priced at unknown future values.

Across 2008 and 2009 a large number of credit and structured-credit funds restricted investor withdrawals. Three distinct tools were used, and the differences between them decide who bears what. No individual fund is named here; the episode was a category-wide mismatch between the terms offered to investors and the assets held.

The three restrictions, in increasing severity:

A gate, which caps total redemptions in a period at a share of the fund, usually a quarter or a fifth, and carries the rest forward.
A side pocket, which moves designated illiquid assets into a separate class that is not redeemable until those assets are sold.
A suspension, which stops dealing entirely, usually under a clause permitting it when a fair value cannot be determined.

A gate is the most commonly misread. It does not cancel a redemption, and it does not fix a price. The unfilled part queues and is eventually paid at the net asset value of whichever future dealing day it clears on. So the investor keeps the market exposure they asked to be rid of, for a length of time the fund controls, which is why a gate transfers timing risk rather than removing it.

The alternative was worse for those who stayed. Meeting all redemptions in 2008 would have meant selling the most liquid holdings, leaving the remaining investors with a more concentrated and less saleable portfolio. That is the honest defence of a gate and also its cost: someone is worse off under either choice, and the documents decide who.

A redemption right is not a right to cash. It is a right to whatever the terms permit, on a date the terms permit, at a value nobody can quote yet.

Key terms

Gate: A cap on the proportion of a fund that may be redeemed in one period. The excess is carried forward and paid at a later, unknown value.
Side pocket: A segregated class holding assets deemed unsaleable, redeemable only as those assets are realised. It separates the illiquid part from the dealing part.
Dealing day: The date on which redemptions are priced and paid. A gated request is priced on the day it clears, not the day it was made.

Worked example

How long a 20 percent gate actually takes

Illustrative figures scaled down so the arithmetic is followable; they are not the reported amounts. A redemption request of 100,000 units under a gate of 20 percent of the remaining balance each quarter.

First quarter paid: 20,000
Second quarter paid: 16,000
Third quarter paid: 12,800
Total received after nine months: 48,800
Still invested after nine months: 51,200
Price applied to each payment: That quarter's value

Nine months after asking to leave, more than half the money is still exposed, and every instalment settled at a price that did not exist when the request was made.

Check yourself

You request redemption of 60,000 units from a fund gated at 25 percent of the remaining balance each quarter. How much is still invested after three quarters?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.