The last day of a quarter "means deadline day for thousands of hedge funds which now owe payments to those investors who have requested a redemption. Here's a quick run down on redemptions:
Redemption Notice Periods: Most hedge funds have 45-65 day redemption notice periods. This means investors must notify hedge funds 45-65 days before quarter end.
Lock Up Periods: Most hedge funds have lock up periods - the average length of which is one year. What this means is that when someone invests in a hedge fund they agree that they will not take their money out within a certain amount of time requested by the manager. Lock-up periods can range from 3 months to 5+ years. Many funds offer relatively soft lock-up periods which allow investors to pull their money within the lock-up period but penalize them by 1.5-2.5% for doing so.
Gating Clauses: Another way in which hedge funds are shielded from an immediate or short-term run on their assets is through the use of what are often called Gating Clauses. Gating clauses allow hedge fund managers to stipulate that only a certain percentage of assets may be withdrawn from the fund per quarter or year. These were not often used in the past but rumors of dozens of managers recently "closing the gate" have been numerous.
Institutional Investors & Small Hedge Funds: The wild cards here are institutional investors and small hedge funds. Institutional investors often invest such large amounts of money they negotiate more flexible or lenient capital constraint agreements when they make hedge fund investments. On the same note of lenient terms, many small hedge funds do not have gating clauses and often tout their short lock-up periods."
Hedge Fund Blogger
Redemption Notice Periods: Most hedge funds have 45-65 day redemption notice periods. This means investors must notify hedge funds 45-65 days before quarter end.
Lock Up Periods: Most hedge funds have lock up periods - the average length of which is one year. What this means is that when someone invests in a hedge fund they agree that they will not take their money out within a certain amount of time requested by the manager. Lock-up periods can range from 3 months to 5+ years. Many funds offer relatively soft lock-up periods which allow investors to pull their money within the lock-up period but penalize them by 1.5-2.5% for doing so.
Gating Clauses: Another way in which hedge funds are shielded from an immediate or short-term run on their assets is through the use of what are often called Gating Clauses. Gating clauses allow hedge fund managers to stipulate that only a certain percentage of assets may be withdrawn from the fund per quarter or year. These were not often used in the past but rumors of dozens of managers recently "closing the gate" have been numerous.
Institutional Investors & Small Hedge Funds: The wild cards here are institutional investors and small hedge funds. Institutional investors often invest such large amounts of money they negotiate more flexible or lenient capital constraint agreements when they make hedge fund investments. On the same note of lenient terms, many small hedge funds do not have gating clauses and often tout their short lock-up periods."
Hedge Fund Blogger
