Fund of funds lock-up

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myriam2222

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In the EOC on Alternative investments, question 32, the answer states that “funds of funds usually do not impose lock-up periods”.
I don’t really understand that. They invest in other hedge funds, and if such hedge funds have a lock-up period, if the investor of the FoF wants to redeem its participation but the FoF can’t redeem its own participation because of such lock-ups, how can it find the required liquidity to redeem its investors participation?
 
maybe because FoF mix their portofolio with funds with different vintage therefore at any point would have enough funds that already beyond lock up periods to satify normal liquidity requirement + some buffer.
 
When you invest in a pool of investments (funds of funds), not all funds have lock up period. So you can liquidate the hedge funds that have no lock up period.
 
Yes these are the most probable explanations. Thanks guys
 
I worked at a fund-of-funds for a few years and I would dispute the CFA’s claim on lock-ups. Alas, it is in the text so we must respect it as the source of truth. Some of the larger fund-of-funds are able to dictate liquidity terms to the underlying managers. This helps.
In the real world, most hedge fund sub-docs give managers the wiggle room to deny or delay redemptions. HFs, including FOF, are set up in a way that allows the manager to side-pocket illiquid assets and deny investors liquidity for that portion of the portfolio.
And finally, the worst case scenario for many investors, HFs and FOFs could also distribute “in-kind”, of securities or fund share classes. It can be a nightmare to administer.
 
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