The Gate ClauseThe Gate Clause

A gate clause (also called a “lock-up” provision) is a little-known and lesser-used codicil to some hedge fund governing documents,¹ designed to limit investor withdrawals and, thus, avoid a “run on the bank.” Many investment funds are designed with a long-term hold strategy, making the investment illiquid. To incentivize investors and provide liquidity, some funds offer a redemption privilege, effectively creating a market. As a countermeasure to extreme market conditions, however, many funds incorporate gate clauses into their governing documents (for example, a placement memorandum or prospectus).²

While gate clauses may exist in any fund, gates are most typically seen in funds in which the target investment’s lack of liquidity or vol...