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| Redemption Period |
Hedge funds typically limit subscription and redemption possibilities by specifying the dates at which investors can enter the fund, by determining a minimum investment period, the so-called lockup, and by specifying the terms of redemption. The redemption period determines the frequency with which investors can withdraw money from the hedge fund.
Currently, the most common redemption periods are at the end of a month or at the end of a quarter, although we occasionally see much longer periods (e.g., 1 year), particularly for funds investing in rather illiquid markets or securities. Redemption periods are often combined with redemption notice periods that specify how many days in advance investors have to notify that they wish to redeem.
Typically, the notice period is between 30 and 90 days. In addition, hedge funds may impose further restrictions upon redemption, for example, by limiting the number of shares that can be redeemed at any given date or by imposing penalty fees for early redemption.
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Combined, restrictions on redemption limit the possibilities of investors to quickly respond to poor past performance of a hedge fund by withdrawing their money. Occasionally, it can take up to six quarters before a desired redemption can be effective.
Aragon investigates the relation between hedge fund returns and restrictions that limit the liquidity of fund investors. His results suggest that share restrictions allow funds to efficiently manage illiquid assets, and these benefits are captured by investors as an illiquidity premium.
