Longer lockups by hot hedge fund managers — including Eric Mindich's Eton Park Capital Management LP at 4 1/2 years and Carl Icahn's Icahn Associates Corp. at three years — are locking out some institutional investors and fund-of-funds managers.
Most smaller or newer hedge fund managers are still content with standard one-year lockups. But the premier managers are tying up investor money for as long as five years.
A lockup is the period of time in which no liquidity is available. After that time, liquidity is offered on a weekly, biweekly or monthly basis after a set number of days' notice. Sources say most institutional investors, especially pension plans, are reluctant to tie up their assets for lengthy periods, no matter how hot the manager.
"The larger the hedge fund, the less capacity they have, the less likely they are to deal on terms like fees and liquidity," said Robert M. Aaron, chief executive officer of hedge fund administrator DPM LLC, Somerset, N.J. "The $10 billion-plus hedge funds? They don't need to move for anyone. For a hedge fund manager in the $200 million to $500 million range, if a $50 million investment is in the offing … they'll do a lot to get that money."
Joel Katzman, president and chief executive officer of J.P. Morgan Alternative Asset Management, New York, concedes some hedge fund managers are lengthening their lockups "because they can."
He believes others, however, "are in earnest, using the theory that because they are managing in a low-return environment, they need to look for additional return in less traveled spaces that come closer to private equity. Those kinds of investments — debt financing and shorter term private equity deals — need between two and five years to mature and therefore, the hedge fund manager says he needs a longer lockup."
J.P. Morgan Alternatives manages $8.8 billion in hedge funds of funds.