Closed a fund once. Not from losses — from a back-office disaster that delayed audits and triggered redemptions. Taught me how fund death spirals really work.
Leopold's margin call isn't the real problem. He liquidated the public book, paid margin, covered recent LPs. Fine. But now remaining LPs own a completely different portfolio — all illiquid privates.
When we faced redemptions, we sold proportional slices across the entire book. No side pockets. The last thing you do is dump liquids to save yourself while loyal LPs get stuck holding illiquid bags. That's how you destroy trust.
Here's what happens next:
LP's now stare at each other knowing first out wins. This isn't an investment decision anymore — it's pure game theory. Replace Leopold with any other fund. Easy call.
Fund either raises new capital (dilutes you) or gates redemptions under pressure. Even if risk is mostly gone, the structure is broken. Illiquid holdings + redemption pressure + confidence loss = death spiral mechanics.
You don't recover from treating loyal capital like exit liquidity.
Leopold's margin call isn't the real problem. He liquidated the public book, paid margin, covered recent LPs. Fine. But now remaining LPs own a completely different portfolio — all illiquid privates.
When we faced redemptions, we sold proportional slices across the entire book. No side pockets. The last thing you do is dump liquids to save yourself while loyal LPs get stuck holding illiquid bags. That's how you destroy trust.
Here's what happens next:
LP's now stare at each other knowing first out wins. This isn't an investment decision anymore — it's pure game theory. Replace Leopold with any other fund. Easy call.
Fund either raises new capital (dilutes you) or gates redemptions under pressure. Even if risk is mostly gone, the structure is broken. Illiquid holdings + redemption pressure + confidence loss = death spiral mechanics.
You don't recover from treating loyal capital like exit liquidity.