Lockups Return As Crisis Memories Fade

Dec 1 2014 | 2:10pm ET

Hedge-fund managers want their lockups back—and they are willing to negotiate.

For years, liquidity has been the byword among investors, driving hedge funds to reduce or even abandon lock-up periods, during which clients are restricted from redeeming. But as the industry’s performance has waned, some firms are looking to hold on to money for longer, enabling them to invest in more illiquid—and potentially profitable—opportunities.

Two-thirds of new hedge funds insisted on lock-ups of a year or more, according to eVestment, with the average fund imposing a 377-day wait before allowing withdrawals without penalty. But to win over skeptical clients, many are offering fee reductions in exchange for the reduced liquidity, The Wall Street Journal reports, with the size of the reduction tied to the length of the lockup.

New York-based Samlyn Capital cuts 0.25% off its management fee and 2.5% off its performance fee for each of the second and third years.

“As we move further and further from 2008, people are getting more comfortable,” TIG Advisors’ Spiros Maliagros told the Journal. His firm this year launched two new funds with three- and five-year lockups, the longest they’ve been able to impose since the crisis.

Not everyone is certain that the increased comfort is such a good thing. Andrew Beer, whose firm Beechhead Capital Management invests in hedge funds, warned that “people have forgotten a lot of the lessons from the crisis”—even though some investors still have money tied up in funds that blocked redemptions six years ago.

Certainly, lockups of as long as eight years haven’t kept Trian Fund Management from garnering more than $10 billion in assets. And former SAC Capital Advisors trader Gabriel Plotkin has amassed nearly $1 billion for his Melvin Capital Management in spite of a three-year lockup—longer than that imposed by SAC before its guilty-plea to insider-trading charges.

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