A Lock-Up Period is a window of time when investors are not allowed to redeem or sell shares of a particular investment. There are two main uses for lock-up periods, those for hedge funds and those for start-ups/IPOs.For hedge funds, the lock-up period is used to prevent investors from redeeming their shares too soon after the fund has made investments that may be illiquid or take time to generate profits. This allows the fund manager more time to generate returns before having to worry about meeting redemption requests. For start-ups and IPO's, the lock-up period is typically imposed by underwriters as a way to stabilize the price of the newly issued securities. By preventing insiders from selling their holdings immediately after an offering, it gives outsiders confidence that there won't be a sudden flood of supply that could drive down prices.While both types of lock-up periods can be beneficial, they also come with some potential drawbacks.For example, if a company goes bankrupt during a lock-up period, shareholders may be unable to sell their shares and recoup any losses until after the bankruptcy proceedings have concluded (which can take years). Also, if market conditions change drastically during a locked-up period (e.g., interest rates rise sharply), shareholders may find themselves stuck with an investment that has become much less attractive than it was at purchase.
