With the outbreak of the coronavirus and the subsequent social upheaval, markets have become increasingly volatile. That volatility has resulted in the first bear market since the 2008 financial crisis and has negatively affected both equity and debt markets. Some funds have put up negative performance figures, while others have become – or may soon become – subject to redemptions from investors in need of liquidity. Both consequences have materially increased the occurrence of and likelihood that net asset value decline triggers (NAV Triggers) will be tripped by funds. Once those triggers are breached, hedge funds and their managers will find themselves in the precarious position of being subject to termination by their swap dealers, prime brokers and other counterparties. In a guest article, Poseidon Retsinas, founder of HedgeLegal, unpacks the components of NAV Triggers and highlights important negotiation points and current market practices. The article also recommends actions that managers should take in consideration of recent events to protect their trading lines, investors and businesses. For more on valuation by private fund managers, see “Failure to Consider Relevant Market Inputs When Valuing Assets May Draw SEC Enforcement Action Against Fund Managers
” (Apr. 20, 2017).