Imagine needing to withdraw your investment from a fund and being unable to. This is the exact dilemma that investors all over the world have faced. For some, it has been temporary. For others, their money has never been recovered.
The Global Financial Crisis was a primary example of this, but more recently Australian investors have been affected by redemption risks and eventual collapses in schemes such as First Guardian and Shield Master Funds, along with Australian Fiduciaries.
When you invest, it is easy to assume that you can withdraw your funds at any time without issue. Perhaps you might lose some money depending on what markets are doing on a given day, but the assumption remains that your money is yours and accessible whenever you want.
It is easy to forget that investments vary. Some may be highly liquid, like shares, while others are considered illiquid — making them harder to sell quickly — such as certain commodities or property. Many funds include restrictions on withdrawals to manage their ability to return capital and control liquidity.
Some restrictions, like redemption gates, are outlined in a fund’s product disclosure statement. However, a fund may also take temporary measures, such as a redemption suspension, to protect capital.
In this article, I will explore redemption risk and the various measures funds may implement to manage it.
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The terms ‘redemption’ and ‘withdrawal’ are sometimes used interchangeably in Australia to refer to taking money out of an investment.
However, ‘redemption’ more commonly refers to funds holding less liquid assets — such as hedge funds, private credit and fixed interest funds — and describes the process of being repaid the principal invested (and interest), either before or at maturity.
It can be helpful to think of a withdrawal as taking part of your investment, while redemption refers to receiving the full amount back.
Redemption risk is the risk that a fund manager or issuer is unable to meet demand for redemptions or withdrawals due to insufficient liquidity, or without causing losses to the fund and its remaining investors.
This situation can arise due to factors such as:
- Liquidity constraints: where there is insufficient liquidity built into the fund structure to manage regular withdrawals or redemptions.
- Market volatility and a ‘run on the fund’: where market conditions prompt many investors to seek access to cash simultaneously, overwhelming the fund’s liquidity.
- Fund performance or manager concerns: this may relate to structural issues or mismanagement, or to investor behaviour where large groups attempt to redeem at the same time.
Market volatility can be temporary. Investors saw this in 2023 when the construction industry faced a number of challenges and high-profile collapses. Some funds suspended or limited withdrawals, or even froze redemptions during this period to manage broader industry pressures. Examples include the Charter Hall Direct PFA Fund which limited redemptions and Centuria 25 Grenfell Street Fund, which suspended distributions in the 2024 financial year.
Fund managers use a range of tools to manage redemption and liquidity risks, including cash reserve buffers, lock-up periods, levies, gates and suspensions.
Funds that hold more illiquid assets often implement measures to manage liquidity through various restrictions. Some of these are disclosed in the product disclosure statement, while others may be introduced temporarily during periods of market stress.
These are important to understand so you are not caught off guard when you need access to your money:
- Redemption gates
These limit the amount an investor can withdraw at a given time. This may be based on total fund assets (for example, no more than 5% of the fund’s value) or on the investor’s holding (for example, no more than 20% of their invested capital). These limits may be permanent or applied in specific circumstances.
For example, the Trilogy Industry Property Trust offers withdrawals at specific periods in time but the offer can’t exceed 3% of the net asset value of the fund at the time.
- Lock-up periods
Some funds impose a minimum holding period during which investors cannot redeem their investment.
For example, Rixon Income Fund has a minimum investment period of 12-months before an investor can request a redemption. Some funds may not allow redemptions in a Fund for the term of investment as the assets are illiquid. Such funds are typically designed for wholesale or institutional investors, such as Arbitrium Credit Partners Fund or Axon Capital Private Medical Property Trust which don’t offer redemptions for the investment term.
- Levies
Where redemptions or withdrawals are permitted, funds may apply fees or adjust buy/sell spreads to account for transaction and administrative costs. These can also act as a deterrent to frequent withdrawals.
- Suspensions
In periods of heightened liquidity risk, a fund may suspend withdrawals or redemptions temporarily to protect investors. In some cases, regulators such as ASIC may intervene where there are compliance concerns or risks to investors. This may include suspending withdrawals or halting trading in a fund.
More information on frozen funds is available at ASIC.gov.au.
Certain types of funds are more exposed to redemption risk and the use of liquidity management tools such as gates, lock-up periods and suspensions. These include private markets, alternative assets, property and fixed income funds, which are more likely to hold illiquid investments.
It is important to understand the liquidity constraints of any investment you are considering and whether it offers withdrawals or redemptions — never assume that it does. You should also be aware of any specific windows or conditions under which redemptions are permitted.
If you invest in funds with higher redemption risk, consider how to balance this within your broader portfolio. Maintaining liquidity elsewhere, such as through cash reserves or more liquid investments, can help ensure access to funds when needed.
Seeking advice from a financial professional can also help you determine whether investments with liquidity constraints are appropriate for your individual circumstances, goals and needs.
The Rixon Income Fund is an asset-backed lender with a Target Return of 10-12% p.a. with distributions paid monthly in cash.
The Fund invests in a portfolio of secured loans of $20m to $80m, in mid-market non-investment grade Australian corporates that are currently underserviced by banks and credit funds. (For Wholesale Investors Only)
The Trilogy Industrial Property Trust is designed to provide a competitive and regular income and the opportunity for long-term capital growth.
An exciting opportunity to invest into Toronto Private Hospital.
Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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