Canadian Securities Course (CSC) Level 2 Practice Exam

What is significant about the lock-up period for hedge funds?

1. Lighter regulations and manager risk.

2. Low correlation and absolute returns.

3. When hedge funds can't be redeemed.

4. Hurdle rate that must be achieved before fees are paid.

The correct answer is: When hedge funds can't be redeemed.

The lock-up period for hedge funds is significant because it refers to the time frame during which investors cannot redeem their shares or withdraw their invested capital. This feature allows hedge fund managers to make longer-term investment decisions without the pressure of needing to return capital to investors on short notice. By preventing redemptions during this period, funds can pursue strategies that may require a longer time horizon to realize gains without the risk of sudden withdrawals disrupting their investment plans. The other options, while relevant to hedge funds in different contexts, do not directly address the essence of what a lock-up period signifies. The focus of the lock-up period is specifically on redemption restrictions, supporting the stability and flexibility of the fund's investment strategy.