Gate
A gate is a fund LPA provision allowing the GP to limit aggregate LP redemptions during any single redemption period — typically capped at 10–25% of fund NAV. When LP redemption requests exceed the gate, the redemption pool pro-rates down to the gate amount; remaining redemption requests carry forward to subsequent windows. Activates during stress periods to prevent fire-sale of fund assets.
Gates are the structural protection against the 'run on the fund' problem. Without gates, a fund facing 50%+ aggregate redemption requests in a single window would have to sell positions at distressed prices to meet the redemption — destroying NAV for both redeeming and remaining LPs. Gates limit the redemption pool to a manageable percentage, allowing the GP to liquidate assets in an orderly manner.
Gate activation is typically GP-discretionary (within LPA-defined limits). The GP determines that the aggregate redemption requests would be 'detrimental to the fund's other LPs' — typically when the percentage exceeds the LPA's gate threshold. Once invoked, the LP's redemption pro-rates: an LP requesting full $5M redemption when the gate fires at 25% receives $1.25M and carries the remaining $3.75M to the next window.
The LP-level consequence is that requested redemption amounts may not equal received amounts during stress periods. An LP planning to redeem a position during a market downturn may receive only a fraction in the first window, with the rest pushed out by 1–4 quarters. The full exit can take a year+ during sustained stress.
Gates were widely activated during the 2008 crisis. Many hedge funds invoked gates in late 2008 and early 2009 to handle the surge in LP redemption requests; some gated for 12–18 months. The post-2008 industry response: more transparent gate provisions, more LP-favorable activation thresholds, and broader use of side-pockets (a related mechanism for illiquid positions) to handle similar pressure without gate activation.
Synthetic hedge-fund positions should track redemption-request history and any gate activations during the LP's tenure. Stress-period scenarios should produce gate activations with corresponding partial redemption fulfillment. Test scenarios should include the multi-quarter redemption queue case where an LP's exit takes 4+ windows due to repeated gate activations.
Common pitfalls
- Treating gates as theoretical — they activate during real stress periods, with real LP-level consequences for liquidity planning.
- Forgetting that gate-pro-ration applies across all LPs in the same window — earlier-submitted requests aren't preferred over later-submitted ones.
- Confusing gates with lockups — lockup prevents redemption entirely; gate limits aggregate redemption while still permitting partial.
- Missing the carryforward mechanic — gated portions of a redemption request don't disappear; they queue for the next window.
Examples
Hedge fund with 25% gate. Aggregate LP redemption requests in Q1 stress window: 60% of fund NAV. GP activates gate; aggregate redemption capped at 25% of NAV. Each LP's request pro-rates: 25/60 = 41.7% of requested amount delivered. LP requesting full $10M redemption receives $4.17M in Q1; remaining $5.83M auto-queues for Q2. If Q2 requests also exceed the gate, the queue continues. Full exit could take 3+ quarters in sustained-stress scenarios.