Lock-Up Period

Lock-Up Period

What is a blocking period?

A blocking period is a window of time when investors are not allowed to redeem or sell shares of a particular investment. There are two main uses for blocking periods, those for hedge funds and those for start-ups / IPOs.

For hedge funds, the block period is to give the hedge fund manager time to exit investments that may be illiquid or otherwise unbalance their investment portfolio too quickly. Hedge fund locks generally last 30 to 90 days, giving the hedge fund manager time to exit investments without pushing prices up relative to their overall portfolio.

For start-ups or companies wishing to go public through an IPO, the blocking periods show that the company’s leadership remains intact and that the economic model remains solid. This also allows the issuer of the IPO to keep more cash to continue growing.

How a blocking period works

The blocking period for hedge funds corresponds to the underlying investments of each fund. For example, a long / short fund invested mainly in liquid stocks may have a blocking period of one month. However, since event funds or hedge funds often invest in less traded securities such as distressed loans or other debt, they generally have extended hold periods. However, other hedge funds may not have a blocking period at all depending on the investment structure of the fund.

At the end of the blocking period, investors can redeem their shares on a defined schedule, often quarterly. They normally must give 30 to 90 days notice so that the fund manager can liquidate the underlying securities that allow payment to investors.

Key points to remember

  • Blocking periods are times when investors cannot sell particular stocks or securities.
  • Blocking periods are used to preserve liquidity and maintain market stability.
  • Hedge fund managers use them to maintain the stability and liquidity of the portfolio.
  • Startups / IPOs use them to conserve cash and be resilient in the market.

During the standstill period, a hedge fund manager can invest in securities in accordance with the fund’s objectives without worrying about buying back shares. The manager has time to build solid positions in a variety of assets and to maximize potential gains while keeping less cash in reserve. In the absence of a lock-in period and a scheduled redemption schedule, a hedge fund manager would need a large amount of cash or cash equivalents at all times. Less money would be invested and the returns could be lower. In addition, since the blocking period of each investor varies according to his personal investment date, a massive liquidation cannot take place for a given fund at the same time.

Blocking periods can also be used to retain key employees, where stock allocations are not redeemable for a period of time to prevent an employee from moving to a competitor, maintaining continuity or until he has completed a key mission.

Example of a blocking period

For example, a notional hedge fund, Epsilon & Co., is investing in troubled South American debt. Interest yield is high, but market liquidity is low. If one of Epsilon’s clients sought to sell a large part of its portfolio to Epsilon at some point, it would likely send prices much lower than if Epsilon sold parts of its holdings over a longer period of time. But since Epsilon has a 90-day blocking period, this gives them time to sell more gradually, which allows the market to absorb sales more evenly and keep prices more stable, which results in a better result. for the investor and Epsilon than otherwise. have been the case.

Special considerations

The blocking period for newly issued public shares of a company helps stabilize the share price after entering the market. When the price and demand for shares increases, the company brings in more money. If corporate insiders sold their shares to the public, it would appear that the company was not worth investing in, and stock prices and demand would drop.

When a private company begins the public offering process, key employees are paid little in exchange for company shares. Because receiving shares is like receiving a paycheck, many of these employees want to cash their shares as soon as possible after the company is listed on the stock exchange. The blocking period prevents the sale of securities immediately after the IPO when stock prices may be exaggerated and likely to fall after the company’s IPO.

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