Lock-up Period

Explanation

A lock-up 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 lock-up periods, those for hedge funds and those for start-ups/IPO’s.

For hedge funds, the lock-up period is intended to give the hedge fund manager time to exit investments that may be illiquid or otherwise unbalance their portfolio of investments too rapidly. Hedge fund lock-ups are typically 30-90 days, giving the hedge fund manager time to exit investments without driving prices against their overall portfolio.

For start-ups, or companies looking to go public through an initial public offering (IPO), lock-periods help show that company leadership remains intact and that the business model remains on solid footing. It also allows the IPO issuer to retain more cash for continuing growth.

Example

As an example, a fictitious hedge fund, Epsilon & Co., invests in distressed South American debt. The interest returns are high, but the market liquidity is low. If one of Epsilon’s customers sought to sell a large portion of its portfolio in Epsilon at one time, it would likely send prices far lower than if Epsilon sold portions of its holdings over a longer period of time. But since Epsilon has a 90-day lock-up period, it gives them time to sell more gradually, allowing the market to absorb the sales more evenly and keep prices more stable, resulting in a better outcome for the investor and Epsilon than may otherwise have been the case. 

RE: https://www.investopedia.com/terms/l/lockup-period.asp#:~:text=A%20lock%2Dup%20period%20is,shares%20of%20a%20particular%20investment.&text=For%20hedge%20funds%2C%20the%20lock,portfolio%20of%20investments%20too%20rapidly.