Soft Lock-Ups Spread

Chidem Kurdas

Investors don’t like the idea of having their money locked up. A noticeable aversion to long-term commitments – compared to before the 2008 crisis – appears to be here to stay.

But certain strategies are difficult or risky to carry out without a stable capital base. Managers with those strategies want to discourage redemptions, at least for new money coming into funds.

The answer may be a soft lock-up, a more flexible provision than the usual agreement to keep the capital in the fund for the first one or two years.

With a soft lockup, the investor has to pay a – usually hefty – fee to redeem within a certain time frame. For investors worried about possibly needing the money during the period, this provides a way out.

For managers, the extra fee is compensation for the inconvenience if the investor does withdraw during the specified time.

One-year soft lock-ups with a 2% early withdrawal fee have become fairly common, according to industry people. Some funds have sliding scales for early withdrawal fees, which decline over time and go to zero usually after a year.

Hard lock-ups have not disappeared and managers that have no trouble getting investors can still demand lengthy commitments. But most lock-ups are now limited to one year, whereas in the past they might have been two or even three years.

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