The credit crisis witnessed unprecedented deployment of liquidity management tools that, prior to the crisis, lay dormant in fund documents – tools such as fund-level gates, investor-level gates, hard and soft lock-ups, rolling redemption periods, holdbacks, redemption suspensions and side pockets. The stigma previously attached to use of such tools faded as survival became the paramount imperative. See “Stigma Fades as Use of Gates Becomes More Common
,” Hedge Fund Law Report, Vol. 1, No. 29 (Dec. 24, 2008). In addition, managers sought to stem the tide of outflows to ensure that remaining investors were not left with the least liquid assets, and to facilitate the execution of longer-term investment strategies. See “Investors in Hedge Fund Strategies Increasingly Demanding Separate Accounts to Avoid Gates and Other Consequences of Commingled Investment Vehicles
,” Hedge Fund Law Report, Vol. 2, No. 9 (Feb. 26, 2009). The constituent documents of funds being launched today reflect the experience of the past year and a half. At least for the time being, investors still have the upper hand in many cases in negotiating capacity with hedge fund managers, and many of those investors are demanding more specific liquidity provisions in fund documents. In particular, investors are asking for – and in many cases getting – more specificity with respect to the circumstances in which liquidity management techniques may be employed, and the particular techniques that may be employed in specific circumstances. The old approach was to vest essentially plenary discretion in the manager to lower a gate, suspend redemptions, etc. in a wide variety of circumstances. The new drafting reflects an effort to enumerate the circumstances in which liquidity may be curtailed. At the same time, investors and managers continue to recognize the impracticability of describing every circumstance in which liquidity restrictions may be prudent. So while the drafting of liquidity management provisions is getting more precise, it still leaves room – albeit less room – for manager discretion. We discuss relevant standards promulgated by the Hedge Fund Standards Board, and changes to those standards to reflect the trend toward more specific liquidity management disclosure, offer practitioner insight on the rationale for the trend and – importantly – provide actual language from the PPMs of two recently-launched hedge funds that reflect the new, more specific drafting.