The units issued by a fund that follows an early redemption policy are thus illiquid for some laps of time after being issued. After the lockup period, there is a predefined schedule of redemptions dates with their corresponding penalties.
Some hedge funds also retain the right to suspend redemptions under exceptional circumstances. By lengthening the lockup period, hedge funds obviously seek more stable financing facilities and want to protect themselves from sudden withdrawals by investors.
To illustrate this point, we examine the prospectus of managed futures notes issued by the Business Development Bank of Canada (BDC) on March 27, 2003 and which mature on February 28, 2011. There is a lock-up period lasting until June 30, 2005.
Thereafter, the redemption fees follow a step function. Redemption is allowed every year on June 30 and on December 30 and the fees decrease from 4 to 2% until December 31, 2007. Thereafter, they are nil until the expiration of the notes.
Obviously, BDC wants to discourage withdrawals from 2005 to 2007 and the imposed penalty is higher, the nearer the redemption is from the date of issuance of the notes.
|Early Redemption Policy|