Soft Lock-Up Fees Vary

Chidem Kurdas

Managers’ need for long-term capital and investors’ aversion to irreversible long-term commitments, especially since the 2008 liquidity troubles, has resulted in a variety of “soft” lock-up provisions. While not new, these arrangements have become more widespread.

With a soft lock-up, the investor pays a fee to redeem within a specified time frame, typically one year. When I reported the spread of soft lock-ups a couple of years ago, I mentioned that a 2% early withdrawal fee was fairly common.

Now we hear that there is a wide range of early withdrawal fees, with 2% or even less at the lower end of the spectrum and 5% at the upper end.

Hard lock-ups that do not allow redemption during the first year still exist. Some large investors’ portfolios contain soft lock-up funds with various early withdrawal fees that change over time, hard lock-up funds, funds with gates to restrict redemptions beyond a certain amount and funds with no lock-ups and no other restrictions.

One fund of funds is said to have hired someone to keep track of these many types of provisions, to make sure there is a clear picture of redemption options at any time.

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