Hedge fund investors must consider the relative ease or difficulty of exiting a hedge fund when they make their initial investments. They should consider the lock-up periods, when they can actually expect to receive their disbursements, and whether the disbursements will be in cash or securities. Further, investors should try to ascertain whether lock-up periods only apply to the initial investment or also to follow-on investments. When there are soft lock-ups, investors should be apprised of what the penalty rate is and whether the fund or the fund managers receive the penalty. Finally, while initially perceived as unattractive, gates (suspensions on redemptions) may be a positive policy to put in place since they can lead to less rapid withdrawals from the fund. This more measured pace of fund redemptions is especially important when the fund holds illiquid securities.
These are some of the issues that will be addressed at our Hedge Funds – Due Diligence Conference which will take place in New York City on November 14.