What is a lock-up and why does it matter?

Quick Definition

A "lock-up" or "lock-up period" is a period of time, typically denoted in months and/or years, during which an investor's investment is "locked-up" or not withdrawable, and it generally applies beginning after the date of effective entry into a fund. For example, a fund with a 1-year lock up means that investors must stay invested for a period of at least a year after making an investment. Lock-ups are a control mechanism for fund managers, and are typically constructed with respect to (i) a manager's goals relating to its investment strategy and the time they believe they need for their investment strategy to play out; (ii) a manager's general goals around guaranteeing a period of generating management fees; and (iii) investor-friendliness, whereby lock-ups inherently constrain an investor and their liquidity. Some funds have no lock-up, although this is relatively uncommon; most funds employ a lock-up of at least some duration. The exact duration varies dramatically. Some funds may employ a significant lock-up period, often when their strategy entails a long time to "play out". For example, macro oriented funds that have long-term thesises may wish to employ a longer lock-up to sustain through periods of liquidity and draw downs. On the other hand, funds that are more liquid in their strategy, such as funds that trade in and out of positions and don't hold a significant amount of holdings over a long period of time, may employ shorter lock-ups.