A new phrase investors are learning these days is "raising the gates." So what exactly does that mean? Simply put, to "raise the gates" means investment managers deciding to keep investors from redeeming their investments in hedge funds or funds of funds. Think of a bunch of sheep running for freedom and the farmer slamming the gate shut just before they escape. Here is an article from the NYTimes yesterday that uses the term.
Individual hedge fund investors typically have the ability under their investment agreements to withdraw or "redeem" their funds quarterly or semi-annually. With the stock market dropping, new bankruptcies every day, general panic throughout markets in which hedge funds play (including mortgage backed securities, derivatives, etc.) and straight-up fraud (Bernie Madoff-style), investors are attempting to liquidate their hedge fund investments as quickly as possible - pulling billions out every quarter.
This heavy redemption requires hedge fund managers to liquidate a lot of their fund's holdings into cash in order to satisfy redemptions - making it exceedingly difficult to recover any amount of the money they have lost over the past several months' slide. Many hedge funds are shutting down because of it. So hedge fund managers are exercising clauses in their investment agreements temporarily limiting redemptions to allow them to keep the remaining money working in the markets - not necessarily a bad idea as there are a lot of good down-market plays during a recession and what is lost is already lost.
Quarterly redemptions is one thing that differentiates hedge funds from most private equity and venture capital funds. PE and VC funds often have much longer lock-up periods for investors' money as they typically invest in longer term, less liquid assets (start-up companies, distressed companies, real estate, etc.). So in order to exit a PE or VC fund, investors have to sell their ownership stakes in the secondary market, leaving the fund intact with more leeway to make a comback as our economy eventually rebounds. Investors wishing to sell their private equity or venture capital fund ownership stakes should consult an attorney to make sure they comply both with their fund's restrictions on secondary sales of ownership interests and relevant securities laws.
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