Lock-up provisions restrict an investor’s ability to withdraw capital from a hedge fund for some stated period of time. Traditionally, it was common for hedge funds to lock-up an investor’s contribution for one or two years. In the wake of the recent financial crisis, lock-up provisions received considerable negative publicity as investors attempted to withdraw funds to meet liquidity needs, and were unable to do so.
As such, many hedge funds launched since have determined not to include a lock-up on investor capital. These funds will generally restrict liquidity in other ways, by decreasing the frequency of periodic withdrawal dates and increasing notice periods to effect a withdrawal, for example. Despite the negative association of lock-up provisions, lock-ups are still relatively common and are often important for funds that trade illiquid assets.