Lock-up
A period during which capital cannot be withdrawn from a fund, or shares held by insiders cannot be sold. For a fund investor it is the constraint an illiquidity premium is meant to compensate.
Where you will meet it
Lock-up appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Work out average daily volume and float, and explain how liquidity is measured
“Float is the number of shares actually available to trade: shares outstanding less those held by insiders, governments, strategic holders or under lock-up.”
- Explain what sets alternative investments apart from traditional ones
“Alternatives differ from listed stocks and bonds on several axes at once: they are illiquid, often with multi-year lock-ups; they are valued infrequently and sometimes by appraisal rather than by trade; they use leverage and derivatives more freely; and their fee structures include performance participation as well as a management charge.”
- Discuss event-driven hedge fund strategies: their investment features, how they are put into practice and the role they play in a portfolio
“Distressed securities managers buy the debt of firms near or in bankruptcy to profit from restructuring; positions are illiquid and suit long lock-ups.”
- Compare the ways a private investor can realise a holding and how each choice affects the value it achieves
“An IPO can achieve a high valuation, but it is costly and market-dependent, and lock-ups mean the sponsor usually sells down in stages.”
See also
Practise it
Practise lock-up until it is automatic: questions that explain every wrong option.
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