In a circumstance where redemption request exceeds the given limit, redemptions are usually granted on a first-come, first-serve basis, where the remainder is pro rata distributed on the next given period. The gate will be stated in each fund’s offering documents and varies from fund to fund.
Typical gates range in the area of 15–25% of the fund’s assets. Gates can be on a share class, feeder fund, or master fund level. The following is an example fund that has a 25% gate with the next available redemption date of 31st March. The fund receives redemption requests of 32% of the outstanding shares of the fund.
The first 25% of investor’s capital that was received to be redeemed will be payable according to the fund’s redemption schedule. The remaining 7% will be held over until the next redemption date.
The purpose of a gate is to protect the remaining shareholders of the fund. The gate is usually set with accordance of a limit where the fund manager believes that redemptions past the limit will have adverse effects on the fund.
As Anson (2006) notes, if the fund is fully invested at the time of redemption, the additional transaction costs that otherwise would not be incurred will be borne by all investors. Additionally, the less liquid assets the manager holds, the greater the costs associated with withdrawal.
If a large redemption forced the fund to raise funds to meet the redemption, a fire sale might occur, where all the selling would drive down the price of the assets the fund holds and set off a material decline in the fund’s net asset value.