When an investor seeks to redeem from a hedge fund, the fund manager must often expeditiously pay the investor’s redemption proceeds based on the then-current net asset value (NAV) of the fund.  See “Structuring, Valuation, Fee Calculation and Other Legal and Accounting Considerations in Connection with Hedge Fund General Redemption Provisions, Lock-Up Periods, Side Pockets, Gates, Redemption Suspensions and Special Purpose Vehicles,” Hedge Fund Law Report, Vol. 3, No. 43 (Nov. 5, 2010).  However, despite a manager’s best efforts to value the fund appropriately, adjustments to the fund’s NAV after the fact may result in corresponding revisions to the redemption proceeds to which the redeeming investor actually was entitled.  To guard against such situations, hedge funds typically employ audit holdback provisions so that the fund can retain a portion of a redeeming investor’s redemption proceeds until the fund’s annual audit is finalized.  This article, the first in a two-part series, analyzes the mechanics of audit holdbacks; considers common variables in such provisions; and evaluates potential alternatives to audit holdback structures.  The second article will discuss the prevalence of holdbacks in the hedge fund industry; investor response to such provisions; and considerations for hedge fund managers in crafting audit holdback terms.  For more on holdbacks, see “Soft Lock-Ups Help Hedge Fund Managers Reconcile the Goals of Stable Capital and Investor Liquidity,” Hedge Fund Law Report, Vol. 3, No. 45 (Nov. 19, 2010).