Jan 11, 2026

To Lock-Up or Not? Designing Your Fund's Redemption Terms

FUND INSIGHTS

When considering the investor terms and rights for your fund, few provisions will receive as much scrutiny from prospective investors as your redemption terms. Lock-up periods, redemption frequency, notice requirements, and gates can make or break your ability to raise capital—yet they're also critical tools for managing your fund's liquidity and protecting your investment strategy.

For emerging managers, the question isn't just "what redemption terms are fair?" but "what redemption terms will allow me to both attract capital AND run my strategy effectively?"

Let's break down how to think about redemption terms in 2026, what the current market expects, and how to structure terms that work for both you and your investors.

The Decline of the Lock-Up Period

Ten years ago, a one-year lock-up was standard across most hedge fund strategies. Two-year lock-ups weren't uncommon for established managers or illiquid strategies. In recent years, the landscape has shifted dramatically.

The current reality for emerging managers:

No lock-up is increasingly the norm, particularly for liquid strategies
Quarterly redemptions with 45-90 day notice is the competitive standard
Lock-ups longer than one year are rare outside of illiquid or specialized strategies
Investors have the leverage to demand favorable redemption terms, especially when investing with unproven managers

Understanding the Four Key Components of Redemption Terms

Before we dive into specific recommendations, let's define the four main elements of redemption terms:

1. Lock-Up Period

The initial period after an investor's capital contribution during which they cannot redeem. Common terms:

No lock-up: Liquid strategies; Investor can redeem on the first available redemption date
6-month lock-up: Manager-friendly; Investor must remain invested for six months
1-year lock-up: Long-term or semi-liquid strategies; Investor must remain invested for one year
2+ year lock-up: Rare; typically only for private equity or highly illiquid strategies

2. Redemption Frequency

How often redemption windows occur after the lock-up expires. Common terms:

Monthly: Redemptions processed monthly (rare for hedge funds)
Quarterly: Redemptions processed at the end of each quarter (most common)
Semi-annually: Redemptions processed twice per year
Annually: Redemptions processed once per year (rare except for illiquid strategies)

3. Notice Period

How far in advance an investor must notify you of their intent to redeem. Common terms:

30 days: One month's notice
45 days: Standard for many funds
60 days: Common for quarterly redemptions
90 days: Standard for funds wanting maximum visibility into redemptions

4. Payment Timing

When the redemption proceeds are actually paid after the redemption date. Common terms:

Within 30 days: Standard for most liquid strategies
Within 45-60 days: Common to allow for month-end accounting close and audit
95% within 30 days / 5% holdback until audit: Increasingly common structure

Strategy-Based Redemption Terms: What Makes Sense?

Your redemption terms should reflect your strategy's liquidity profile. Here's how different strategies typically approach redemption terms in 2026:

Highly Liquid Strategies

Examples: Futures/commodities, liquid equity long-short (large cap), systematic strategies, volatility trading

Typical redemption terms:

Lock-up: None
Frequency: Quarterly
Notice: 45-60 days
Payment: Within 30 days

Why these terms: These strategies trade liquid instruments that can be unwound quickly. You can meet redemptions without disrupting your portfolio. Attempting to impose a lock-up will make you uncompetitive.

Emerging manager consideration: If you're trading futures or large-cap equities, don't even think about implementing a lock-up. You'll lose investors to competitors immediately.

Moderately Liquid Strategies

Examples: Small/mid-cap equity long-short, credit strategies (liquid), event-driven (liquid opportunities), multi-strategy

Typical redemption terms:

Lock-up: None to 6 months
Frequency: Quarterly
Notice: 60-90 days
Payment: Within 30-45 days

Why these terms: These strategies may have some positions that require time to unwind thoughtfully, but they're still primarily liquid. A soft lock-up (6 months) is defensible but not required.

Emerging manager consideration: You can probably justify a 6-month soft lock-up if your strategy genuinely benefits from stability, but be prepared to waive it for larger investors. Many emerging managers in this category are choosing no lock-up to remain competitive.

Less Liquid Strategies

Examples: Distressed debt, private credit, small-cap special situations, activist investing, certain real estate strategies

Typical redemption terms:

Lock-up: 1 year
Frequency: Quarterly or semi-annually
Notice: 90 days
Payment: Within 45-60 days (possibly with holdback)

Why these terms: These strategies involve positions that cannot be quickly unwound without significant market impact or loss of value. A one-year lock-up gives you time to execute your thesis.

Emerging manager consideration: A one-year lock-up is defensible for these strategies, but you'll need to clearly articulate WHY in your PPM and investor conversations. Even here, some emerging managers are shortening lock-ups to six months to attract capital.

Illiquid Strategies

Examples: Private equity overlay, direct lending, structured credit, venture investments

Typical redemption terms:

Lock-up: 2-3 years (or longer)
Frequency: Annually
Notice: 90-180 days
Payment: Subject to liquidity; may take months

Why these terms: These aren't really traditional hedge fund strategies—they involve illiquid investments that may take years to realize value. Long lock-ups are essential.

Emerging manager consideration: If your strategy is truly this illiquid, you're probably structuring as a private equity fund or closed-end vehicle rather than a traditional hedge fund. Make sure your legal structure matches your liquidity profile.

The Gate: Your Safety Valve (Use Sparingly)

A gate limits the total percentage of fund NAV that can be redeemed in any given period (commonly 25-50% of NAV per quarter). Gates protect you from a catastrophic run on the fund that would force fire sales of positions.

Common gate structures:

Fund-level gate: Limits total redemptions across all investors (e.g., "no more than 25% of NAV per quarter")
Pro-rata application: If redemption requests exceed the gate, all redemption requests are reduced proportionally
Rollover provisions: Requests that exceed the gate typically roll to the next redemption period with priority

When gates make sense:

You're running a strategy with some illiquid positions
Your strategy requires multiple years to play out; redeeming LPs negatively impact remaining LPs
You want protection against extraordinary market conditions
You have legitimate concerns about being able to meet redemptions during stress periods

When gates are problematic:

Your strategy is highly liquid (futures, large-cap equity) where a gate isn't justifiable
You're trying to trap investors in a poorly performing fund
You set the gate too low (a 50% quarterly gate is reasonable; a 10% gate is restrictive)

Our recommendation for emerging managers: If your strategy is liquid, skip the gate—it signals lack of confidence. If your strategy has an illiquid component or requires years to materialize, a 25-50% quarterly gate is reasonable protection.

The Redemption Fee: Rarely Worth It

Some funds charge an early redemption fee (e.g., 2-3% of the redeemed amount) if investors withdraw before a certain period. This was more common 10-15 years ago; it's rare among emerging managers today.

Why early redemption fees have fallen out of favor:

They're seen as punitive rather than protective
They create an adversarial dynamic with investors
They're often waived in practice, making them meaningless
They don't really solve the underlying problem (managing fund liquidity)

The Bottom Line: Liquidity Is a Competitive Advantage

Here's what we tell emerging managers: unless your strategy genuinely requires restrictive redemption terms, err on the side of being investor-friendly.

The market has spoken clearly: investors value liquidity, especially when investing with unproven managers. You can always tighten terms later once you've built a track record and have bargaining power.

Our general guidance for most emerging managers in 2026: