A notice period sized on whether the fund can pay is too short. Sized on what the remaining investors are left holding, it is more than three times longer.
A redemption notice period should be the time the fund needs to raise its stressed redemption while keeping enough liquid assets for the investors who stay. On an illustrative 400 million open-ended fund with 18 per cent of NAV saleable within 30 days, a 12 per cent redemption can be paid in 13 days by emptying the liquid buckets, but needs 44 days of notice if 10 per cent of the remaining NAV must stay liquid. The first number answers whether the fund can pay; only the second answers whether it should.
Worked in full in The AIFMD II Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
AIFMD II puts the extension of notice periods on the Annex V list of liquidity management tools, and the manager of an open-ended AIF has to select at least two tools from points 2 to 8 of that list. A notice period is the simplest of them to explain to investors and the easiest to set by habit: 30 days because the peer group uses 30, 90 because the assets are loans. The calibration below replaces the habit with a figure that can be put in front of a board and a supervisor.
| Liquidity bucket (time to sell at a fair price) | % of NAV | Amount |
|---|---|---|
| Cash | 4% | 16.0 |
| 1 to 7 days | 6% | 24.0 |
| 8 to 30 days | 8% | 32.0 |
| 31 to 90 days | 12% | 48.0 |
| 91 to 180 days | 20% | 80.0 |
| 181 to 365 days | 25% | 100.0 |
| Over 365 days | 25% | 100.0 |
| NAV | 100% | 400.0 |
Two policy inputs complete the case. The stressed redemption on one dealing date is 12 per cent of NAV, 48.0 million. And after paying it, at least 10 per cent of the remaining NAV must still be saleable within 30 days. That floor is the whole point: without it, the notice period protects the leavers and nobody else. The buckets follow the time bands of the Annex IV portfolio liquidity profile, with cash shown separately and the first two bands merged, so the input already exists in the reporting file.
Liquid floor = floor rate × (NAV − redemption)
Usable liquid assets = assets saleable within 30 days − liquid floor
Notice period = 30 + 60 × (redemption − usable liquid) ÷ the 31 to 90 day bucket, when the shortfall falls in that bucket
In Excel, with the shortfall in B5 and the bucket in B6: =30+60*B5/B6. The same interpolation applies bucket by bucket if the shortfall runs further.
Step 1: the floor. After a 48.0 million redemption the fund is worth 352.0. Ten per cent of that, 35.2 million, has to remain in the three liquid buckets.
Step 2: what the liquid buckets can give. Cash, the 7-day and the 30-day buckets total 72.0 million, 18 per cent of NAV. Keeping 35.2 leaves 36.8 million that can go to the redeeming investors. The floor is taken from the slowest of the liquid assets, so the cash and the 7-day bucket are used first.
Step 3: the shortfall. 48.0 less 36.8 is 11.2 million, which must come from the 31 to 90 day bucket. That bucket holds 48.0 million and, assuming sales spread evenly across its 60 days, releases 0.80 million a day. 11.2 million is 0.233 of the bucket, or 14 days into it.
Step 4: the notice period. 30 + 14 = 44 days. In practice the policy would say 45 days before the dealing date, plus whatever settlement lag the fund needs to turn sale proceeds into a payment.
Run the same redemption without the floor and the fund pays in 12.8 days: 16.0 of cash, 24.0 from the 7-day bucket and 8.0 of the 32.0 in the 30-day bucket. That is the figure a liquidity model typically produces, because it asks only whether the redemption can be met. It can, quickly. But the remaining investors are left with 24.0 million of liquid assets on 352.0 of NAV, a liquid share of 6.82 per cent against 18.0 per cent before the redemption. The next quarter's dealing date arrives with a fund that cannot honour its own terms.
The notice period is a fairness tool, not a speed limit. Its job is to give the manager time to sell a fair slice of the portfolio rather than the easiest one. A period sized only on the time to raise cash builds the first-mover advantage into the fund documents.
| Redemption, % of NAV | No floor | Floor 5% | Floor 10% | Floor 15% |
|---|---|---|---|---|
| 8% | 5 | 5 | 6 | 49 |
| 12% | 13 | 20 | 44 | 66 |
| 16% | 24 | 41 | 62 | 83 |
| 20% | 40 | 60 | 80 | 99 |
| 25% | 65 | 84 | 101 | 118 |
Two things stand out. The floor matters more than the redemption assumption at the low end: an 8 per cent redemption needs 6 days with a 10 per cent floor and 49 days with a 15 per cent one, because at 15 per cent the floor swallows almost the whole liquid pool. And the periods managers commonly choose support less than they appear to. Read the table the other way round:
| Notice period | Redemption, % of NAV | EUR million |
|---|---|---|
| 30 days | 8.9% | 35.6 |
| 45 days | 12.2% | 48.9 |
| 60 days | 15.6% | 62.2 |
| 90 days | 22.2% | 88.9 |
A fund that combines a 30-day notice with a quarterly gate of 10 per cent has a gate it cannot fund fairly from this portfolio. Either the notice lengthens, the gate falls, or the liquid share rises. The gate calibration answers the same question across a run of quarters; the notice period answers it within one.
Set the notice period as the time to raise the stressed redemption while a stated floor of liquid assets remains for the investors who stay. On this illustrative fund that is 44 days, not the 13 a time-to-cash model reports. The liquidity tools, the stress tests and the reverse stress level of an open-ended credit fund are worked through in the free workbook for this case, where the same buckets drive every figure.
Yes. AIFMD II lists the extension of notice periods among the liquidity management tools in Annex V, and the manager of an open-ended AIF has to select at least two tools from points 2 to 8 of that list. A standing notice period is calibrated in the same way as an extended one: on the illustrative 400 million fund, 44 days covers a 12 per cent redemption with a 10 per cent liquid floor kept for remaining investors.
Because the fastest way to raise the cash is to sell the most liquid assets first. On the illustrative fund a 12 per cent redemption is paid in 13 days that way, but the liquid share of the remaining portfolio falls from 18.0 per cent to 6.82 per cent. The investors who stay then own a fund that cannot meet the next dealing date, which is the dilution the notice period is meant to prevent.
On the illustrative profile, with 10 per cent of the remaining NAV kept liquid and sales spread evenly across each liquidity bucket, a 90-day notice supports a redemption of 22.2 per cent of NAV, 88.9 million on 400.0. A 30-day notice supports 8.9 per cent and a 60-day notice 15.6 per cent. The relationship is not linear because each longer bucket is larger but slower.
This article is one calculation from The AIFMD II Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: regulation, compliance and banking → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.