Lock-Ups and Gates - Managing Fund Liquidity and Redemptions

By EC Assets Research Team, Alternatives Research · Published 20 May 2026 · Updated 16 October 2026

Lock-Ups and Gates: Lock-ups (minimum holding periods) and gates (caps on redemptions per period) are the tools funds use to align how fast investors can withdraw with how fast their assets can be sold. They protect remaining investors from a fire sale in a run - by restricting those who want to leave - and exist to manage liquidity mismatch.

What Lock-Ups and Gates Are

Lock-ups and gates are the contractual terms that decide when and how fast investors can withdraw money from a fund. They address a basic tension: a fund holding assets that take time to sell cannot honestly promise immediate cash. Aligning the fund's liability liquidity, how fast investors can redeem, with its asset liquidity, how fast holdings can be sold without large losses, is their purpose.

A lock-up is a minimum period after investing during which an investor cannot redeem, or can only redeem by paying a fee. A gate limits redemptions on each dealing date after the lock-up has expired. Together with notice periods, side pockets and suspension rights, they determine the liquidity an investor actually has, which can differ greatly from the headline dealing frequency.

How It Works

Lock-ups. Hard lock-ups, commonly one to two years in hedge funds, bar redemptions entirely; soft lock-ups allow early redemption against a fee, often a few percent, usually paid into the fund to compensate remaining investors.

Notice periods. Redemptions must be requested in advance, often 30 to 90 days before a monthly or quarterly dealing date. Many funds also hold back part of the proceeds, for example 5 to 10 percent, until the annual audit confirms the net asset value.

Gates. A fund-level gate caps total redemptions on a dealing date at a share of NAV; requests above the cap are paid pro rata and the remainder carried forward. An investor-level gate caps each investor's redemption at a share of its own holding.

Side pockets and suspension. Illiquid or hard-to-value assets can be moved into side pockets that are realised only when the assets are sold, and in extreme conditions managers can suspend redemptions altogether.

Aragon (2007) found that funds with lock-ups and long notice periods earned higher returns than funds with lenient terms, consistent with a premium for holding less liquid assets. Ang and Bollen (2010) value the lock-up as a real option given up by the investor, and find that its cost can be material when a fund's prospects deteriorate.

Worked Example

A fund with quarterly dealing and a 25 percent fund-level gate receives redemption requests for 60 percent of its NAV of 100, and no new requests arrive afterwards:

Ignores investment gains and losses; the gate is 25 percent of NAV on each dealing date.

On the first date each redeeming investor receives about 41.7 percent of its request, and it takes four quarters to exit fully. Under an investor-level gate of 25 percent of the current holding instead, an investor that wants to leave entirely still holds 75.0, 56.3, 42.2 and 31.6 percent of its position after one to four quarters. With a 90-day notice period on top, the first cash may arrive six months after the decision to redeem.

When It Applies (and Limitations)

Liquidity mismatch. The core danger is offering frequent redemptions against assets that cannot be sold quickly. In 2008 many funds that had promised monthly liquidity on illiquid credit gated or suspended, trapping investors when they most needed cash. The Financial Stability Board (2017) made liquidity mismatch in open-ended funds a central policy concern.

Gates can trigger runs. Investors who expect a gate may redeem early to get ahead of others, accelerating the outflows the gate was meant to manage.

Semi-liquid vehicles use the same tools. Evergreen private real estate and private credit funds sold to wealthier individuals typically promise limited periodic redemptions, often around 5 percent of NAV a quarter. When requests exceeded those limits in 2022 and 2023, several such funds pro-rated withdrawals for months.

Terms differ by share class. Large or early investors sometimes negotiate better liquidity, which can leave other investors bearing more of the cost of a run.

Discretion matters. Many gates and suspensions are at the manager's discretion, so the documents and the manager's past conduct matter as much as the stated terms.

Why It Matters for Institutional Investors

Real portfolio liquidity. Summing headline dealing frequencies overstates how quickly a portfolio of funds can be turned into cash. Modelling gates, notice periods and holdbacks gives a realistic liquidity profile.

Matching terms to strategy. Monthly liquidity is reasonable for a fund trading liquid equities; for a private debt or distressed strategy it is a mismatch waiting to surface. The fund structure should fit the assets.

Pricing liquidity. Accepting longer lock-ups can be rewarded through lower fees or access to less liquid strategies, a trade an investor with stable liabilities may be well placed to make.

Due diligence. Reading lock-up type, gate mechanics, side-pocket and suspension rights, and how the manager used them in past stress is part of manager selection.

References

1. Aragon, G. O. (2007). Share Restrictions and Asset Pricing: Evidence from the Hedge Fund Industry. Journal of Financial Economics, 83(1), 33-58.
2. Ang, A., & Bollen, N. P. B. (2010). Locked Up by a Lockup: Valuing Liquidity as a Real Option. Financial Management, 39(3), 1069-1096.
3. Teo, M. (2011). The Liquidity Risk of Liquid Hedge Funds. Journal of Financial Economics, 100(1), 24-44.
4. Financial Stability Board. (2017). Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities. FSB.