During the recent financial crisis, more than 30% of hedge fund managers in our sample exercised discretionary authority to restrict investor liquidity using mechanisms such as side pockets and gates. Using a hand-collected dataset of hedge fund investor interests, we examine the determinants of...

We study hedge funds that imposed discretionary liquidity restrictions (DLRs) on investor shares during the financial crisis. DLRs prolong fund life, but impose liquidity costs on investors, creating a potential conflict of interest. Ostensibly, funds establish DLRs to limit performance-driven...