Title: Locked up by a lockup
Description: "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"--National Bureau of Economic Research web site.