Although not a new structure, the increased use of investor-level gates to revise liquidity terms and improve liquidity profiles is a positive credit development that improves overall hedge fund asset-liability management, says Moody's Investors Service in a new report.

Embraced over the last few weeks by several large and well-established hedge funds, gate provisions limit the amount of withdrawals from a fund by a specific redemption date. The intent is to prevent a run that could cause the fund to self-destruct as substantial withdrawals would force the investment manager to sell assets rapidly, possibly in a fire sale, says the Moody's report.

"They also promote the orderly unwinding of positions and alleviate the pressure of en masse investor redemptions during liquidity or market stress events," said Moody's Assistant Vice President-Analyst Michael Ryan, author of the report. "Investor-level gates also help reduce legal risks faced by managers as they balance competing interests of redeeming investors and those remaining invested in a fund."

Investor-level gates independently limit redemptions for each of a fund's underlying investors. In an important distinction, Ryan said, fund-level gates incentivize investors to submit "defensive redemptions" as soon as possible to get in line for liquidity, which is particularly evident during periods of market stress.