As reported by WealthBriefing recently, private bankers fear that some clients of hedge funds face the option of taking out money on a “first-come, first-served” basis, which leaves people contemplating the prospect of being at the back of any queue and holding only illiquid assets.

But anecdotal enquiries suggest that such treatment is not widespread. It is essential that private bankers make sure that such treatment is stamped on and that they insist that redemptions are managed equitably. Now is a good time for wealth managers to insist on such behaviour as many funds, eager for client money, are more likely to listen than they would have done two years ago.

Many funds are either imposing gates – which restrict how much clients can withdraw at a given time – or demanding longer notice periods or creating separate share classes for liquid and illiquid assets. In some cases, where cash is in short supply, a fund or fund-of-fund manager can pay out a mixture of cash and equivalent assets to ensure that “leavers” and “stayers” in a fund get treated equally.

Redemptions in the past have been treated fairly well but what has changed, and put so much focus on the problems of illiquid assets, has been the sheer scale of the pullouts, argues Shayne Krige, who is a partners at Maitland Advisors.

Mr Krige stresses that the fine print of hedge funds’ documentations usually spells out the conditions under which redemptions will be halted or restricted, so that clients typically have few grounds to complain. But as he says, this should encourage wealth managers to do more to educate their clients about such issues before entering a fund.

Guidance on these issues is unfortunately not easy to get from the likes of the UK’s Financial Services Authority, the regulator. The watchdog’s “Treating Customers Fairly” intiative tends to bypass hedge funds inasmuch as these investment pools apply to non-retail clients, such as institutions or high net worth individuals. So investors should not expect – yet – much from the UK regulator.

If or when hedge funds became a more retail product, then the FSA will become involved, however. It would certainly be good to have some clearer views from the FSA about the general issue of how redemptions from funds should be handled.

The stakes of getting redemptions right are high. For the hedge fund industry as a whole, 2008 was its grimmest year, with losses averaging more than 18 per cent for the year. Up to 30 per cent of private investments in hedge funds could be redeemed by early this year. However, if wealth managers and fund administrators ensure that liquidation of funds is managed equitably, clients will be more inclined to return rather than spurn the sector forever.

Treating customers fairly is not just a UK regulator’s slogan, it makes smart business sense in the long run. Hedge funds have taken a nasty blow, but they are not out for the count.