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Short money can't fund long bets
How bank runs happen
The financial industry works by matching the duration of liabilities and assets. A bank gives depositors immediate liquidity, so if it holds illiquid assets with a 10-year horizon, it ends up with a bank run.
The hedge fund version
A hedge fund with quarterly liquidity and 10-year investments is an institutional bank in the same position. Cedar Hill had a two-year share class, and that still didn't fit businesses that might need capital for three, five, or ten years.
A vehicle for each horizon
So the firm created Liberty City Ventures and put those investments in individual vehicles that fit each time horizon. That let it invest across the whole life cycle, from early-stage companies to public ones, and across the whole capital structure, through credit default swaps, preferreds, and discounts.
Why do bank runs happen?
A bank keeps only a fraction of deposits as cash and lends the rest, so it cannot pay everyone at once. Economists Douglas Diamond and Philip Dybvig modeled this in a 1983 paper: if depositors expect others to withdraw, withdrawing becomes the sensible move for each of them, and the fear becomes self-fulfilling. Thousands of US banks failed in the early 1930s, and Congress created the FDIC in 1933 to insure deposits. Diamond and Dybvig shared the 2022 Nobel Prize in economics with Ben Bernanke for research on banks and financial crises.
How did Silicon Valley Bank's mismatch play out?
Silicon Valley Bank held large amounts of long-dated bonds funded by deposits that customers could withdraw on demand. When interest rates rose, the bonds lost market value, and depositors began pulling money out. The bank reported roughly 42 billion dollars of withdrawal requests on March 9, 2023, and regulators closed it the next day. It was the second-largest bank failure in US history at that time.
How do hedge funds limit sudden withdrawals?
Many hedge funds use lock-up periods, which bar withdrawals for a set time after an investment, and notice periods that require investors to ask well before leaving. Funds can also impose gates, which cap the share of assets that can leave in a single period. These rules let a manager hold assets that cannot be sold quickly without being forced to sell at a loss. Many funds invoked gates during 2008 as redemption requests spiked.
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