# Gate Provision: What it is, How it Works, Example

## What Is a Gate Provision?

A gate provision refers to a statement in a fund's offering documents that establishes the fund manager’s right to limit or halt [redemptions](https://www.investopedia.com/terms/r/redemption.asp). The [prospectus](https://www.investopedia.com/terms/p/prospectus.asp) or offering documents may provide more detail on a gate provision, such as scenarios where redemptions would be restricted or halted entirely.

Gate provisions are intended to stop a [run on a fund](https://www.investopedia.com/terms/r/run-on-the-fund.asp), particularly when the assets a fund holds are [illiquid](https://www.investopedia.com/terms/i/illiquid.asp) and difficult to turn to cash for redemption in a timely manner. Even with scenarios and guidelines, the decision to exercise the gate provision is the fund managers.

## Understanding Gate Provisions

Gate provisions restrict redemptions and help to prevent runs on the fund. When a fund, particularly a hedge fund, is holding complex investment products, unwinding positions can take time. The gate provision is built into the fund offering to prevent a situation where redemption requests cost the fund further by forcing liquidation in an adverse market situation.

## The Gate Provision in Practice

Fund managers usually need to inform investors in writing when invoking the gate provision. The notification will usually state the need for the provision and outline how much, if any, investors will be able to receive when they request a redemption. Even though they are part of most fund documents, invoking the gate provision is a serious business and usually involves a consultation with an attorney. Because a gate provision is invoked at the discretion of the fund manager, investors who find their money locked in understandably question the fund manager’s judgment.

Interestingly, a gate provision doesn't always affect all investors equally. [Institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) and preferred clients may have a side letter—a separate agreement with the fund—stating that their money will never be locked in. As a result, some hedge funds have eliminated gate provisions altogether because it doesn't actually cover the majority of the capital in the fund.

## A Famous Example of a Gate Provision

When a fund enacts a gate provision, it is generally seen as a negative event. There have been cases, however, where a fund manager has used the gate provision to make certain that the capital is intact to carry out a critical phase of the strategy.

One such situation was popularized in the film "The Big Short," when Michael Burry invoked a gate provision to halt redemptions so that his bet against the housing market wouldn't be liquidated until the mortgage meltdown occurred. His investors enjoyed massive profits after the gate provision was invoked. However, by all accounts, it was extremely unpleasant for all involved when the gate provision was announced.  

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