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Michael Kitces . In recent years, there’s been no shortage of criticism regarding hedge funds and their 2+20 fee structure (where funds charge an ongoing 2% management fee plus 20% of the upside return). While in theory the advantage of a pay-for-the-upside approach is that it incentivizes managers to performance, in practice it often just gives them a significant share of normal cyclical gains in the market that would have occurred anyway. Lackluster performance has been slowing pushing this fee structure down–now it’s closer to 1.6+18 –but in many cases the real challenge of weak performance is not merely the costs that are still being paid in the meantime, but the fact that hedge-fund investors may not be able to reallocate their capital elsewhere, due to hedge fund “lockup” periods.

For those who aren’t familiar, the lockup period is a time window–often 1-2 years, and sometimes even longer –where investors are not allowed to withdraw their capital and cannot otherwise sell their shares. With weaker performance in recent years–and especially after the turmoil of the financial crisis itself–hedge fund lockup periods have been getting shorter. and some funds are even trading off lower management fees in exchange for investments who are still willing to tolerate a longer lockup period .

While there’s been growing pressure on lockup periods, though, the underlying intention is arguably quite sound: Not every sound long-term investment idea has immediate results, and a lockup period can allow an investment manager to truly invest for the long term and not be concerned about near-term withdrawals based on short-term performance. In point of fact, Warren Buffett himself has said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

Which means that even investors who can’t, don’t or simply won’t invest in hedge funds directly might still be able to draw a key investing lesson from their structure: For long-term goals, pick investments that you’re really willing to hold in the long term, and if you have to, impose your own “lockup” period on your portfolio to avoid the temptation of short-term trading. It can give you the same investment discipline, but without the hedge-fund costs and problematic investment management incentives !

Michael Kitces is a Partner and the Director of Research for Pinnacle Advisory Group , and publisher of the financial planning industry blog Nerd’s Eye View . You can follow him on Twitter at @MichaelKitces , or connect with him on Google+ .

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