Redemption Gate
A contractual cap on the percentage of a fund's NAV that can be redeemed on a single dealing date, used to prevent a forced-selling spiral.
Definition
A redemption gate is a provision, set out in the fund's LPA or offering documents, that caps the percentage of the fund's total NAV that can be redeemed on any single dealing date. If aggregate redemption requests for a dealing date exceed the gate threshold, the manager scales every request back pro rata to fit within the cap, and the unfilled portion typically rolls forward to the next dealing date rather than being cancelled.
A gate is distinct from a full suspension of redemptions: it does not stop withdrawals outright, it sequences them so the fund is never forced to liquidate a large share of its portfolio in one go to meet requests. It is also distinct from a lock-up period, which restricts an individual investor from redeeming at all during an initial window — a gate applies fund-wide, at the moment of redemption, regardless of how long any given LP has been invested.
Gates are typically triggered automatically once requests cross the stated threshold, though some funds give the manager discretion over whether to invoke one within a defined range rather than making it purely mechanical.
Why it matters
Without a gate, a wave of redemption requests during a market stress event can force a manager to sell the fund's most liquid positions first to raise cash — leaving remaining investors holding a disproportionate share of the least liquid, hardest-to-value assets. A gate spreads that liquidation pressure across dealing dates instead of concentrating it in one forced-sale event.
For LPs, a gate is a liquidity risk they are agreeing to upfront, not a penalty imposed after the fact — understanding whether a fund has one, and at what threshold, is a standard part of evaluating redemption terms during due diligence.
Pro-rata scale-back
1. The manager totals all redemption requests submitted for a given dealing date and compares them to the gate threshold, expressed as a percentage of the fund's NAV.
2. If total requests exceed the threshold, every requesting LP receives the same pro-rata fill percentage: fill % = gate cap ÷ total requests.
3. Each LP's payout for that cycle is their requested amount × the fill percentage; the unfilled balance carries forward and is typically prioritized (or re-queued alongside new requests) at the next dealing date.
Scaling back requests to fit the gate
A fund has a NAV of $40,000,000 and a redemption gate set at 20% of NAV — a $8,000,000 cap per dealing date. Total redemption requests for the current dealing date add up to $12,000,000, which is 30% of NAV and exceeds the cap.
The fill percentage is $8,000,000 ÷ $12,000,000 = 2/3 ≈ 66.67%. An LP who requested $300,000 receives $300,000 × 66.67% = $200,000 this cycle, with the remaining $100,000 rolling forward to the next dealing date.
Common mistakes
Confusing a gate with a full redemption suspension — a gate limits how much of the fund is redeemed at once, it does not halt withdrawals entirely.
Assuming a gate applies per investor rather than fund-wide — the scale-back is typically applied pro rata across every requesting LP, not as a cap on any single investor.
Treating a gate as protection against loss — it only sequences liquidity over time; it does nothing to limit how far the fund's NAV can decline.
Confusing a gate with a side pocket — a side pocket isolates specific illiquid positions from the redeemable pool entirely, while a gate limits the pace of redemptions from the fund as a whole.
In practice
Redemption gates are especially relevant to crypto funds because crypto liquidity crunches tend to be correlated and sudden — an exchange insolvency, a stablecoin depeg, or a major DeFi exploit can all trigger a wave of redemption requests at exactly the moment the underlying book is hardest to unwind at fair value. A gate gives the manager room to sell in an orderly way rather than into a market that has already gapped down.
Because a gate interacts directly with how a fund values its book, it is worth reading alongside the fund's valuation policy and fair-value hierarchy — a gate threshold only protects investors if the NAV it is measured against is itself reliable.
Questions, answered
What is a redemption gate?
A redemption gate is a contractual limit on the percentage of a fund's net asset value that can be redeemed on a single dealing date. If requests exceed the cap, every requesting investor is scaled back pro rata and the unfilled portion typically carries forward to the next dealing date.
Is a redemption gate the same as suspending redemptions?
No. A gate limits how much of the fund can be redeemed at once but still processes requests up to that cap; a full suspension stops redemptions outright. Funds generally reserve suspension for more extreme circumstances than a routine gate would cover.
How is a redemption gate different from a lock-up period?
A lock-up period restricts an individual investor from redeeming at all during an initial window after they invest. A gate applies at the fund level, at the moment of redemption, capping how much of the fund's NAV can be paid out on one dealing date regardless of how long any investor has held their position.
Does a gate protect investors from losses?
No. A gate only manages the pace and sequencing of redemptions so the manager is not forced into a rapid, disorderly liquidation. It has no effect on how much the fund's NAV can decline.
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