Locked Up by a Lockup: Valuing Liquidity as a Real Option

56 Pages Posted: 26 Apr 2010 Last revised: 20 Jul 2022

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Nicolas P. B. Bollen

Vanderbilt University - Finance

Multiple version iconThere are 4 versions of this paper

Date Written: April 2010


Hedge funds often impose lockups and notice periods to limit the ability of investors to withdraw capital. We model the investor's decision to withdraw capital as a real option and treat lockups and notice periods as exercise restrictions. Our methodology incorporates time-varying probabilities of hedge fund failure and optimal early exercise. We estimate a two-year lockup with a three-month notice period costs approximately 1% of the initial investment for an investor with CRRA utility and risk aversion of three. The cost of illiquidity can easily exceed 10% if the hedge fund manager can arbitrarily suspend withdrawals.

Suggested Citation

Ang, Andrew and Bollen, Nicolas P.B., Locked Up by a Lockup: Valuing Liquidity as a Real Option (April 2010). NBER Working Paper No. w15937, Available at SSRN: https://ssrn.com/abstract=1594571

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Nicolas P.B. Bollen

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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