Redemption Gates Or Redemption Caps: Why The Difference Matters

Semi-liquid alternative investment funds combine investments in illiquid assets with investor liquidity. To manage liquidity tensions, redemptions may be restricted once they exceed a certain level. Restrictions may take the form of redemption caps or redemption gates.

A cap applies automatically when a pre-set threshold is exceeded. If the cap is hard, it cannot be switched off by the manager. If it is soft, it can be switched off when there is sufficient liquidity, allowing the manager to satisfy redemption requests above the set level. Gates, by contrast, can be switched on by the manager once a relevant pre-set threshold is exceeded, thereby limiting the volume of redemptions. The key difference between a gate and a hard cap is that a gate involves discretion, whereas a cap applies systematically. The difference between a gate and a soft cap is that a gate can be switched on to restrict redemptions, whereas a soft cap can be switched off to allow redemptions.