Anticipated Holding Period

What Is an Anticipated Holding Period?

An anticipated holding period refers to the length of time a limited partnership (LP) expects to hold a specific asset. After the specified time period, the partnership will typically sell the holding, and the capital invested will be repaid to investors through a lump-sum distribution. The anticipated holding period helps to calculate the asset's return, also known as the holding period return.

Understanding an Anticipated Holding Period

A limited partnership (LP) is a formal arrangement by two or more parties to manage and operate a business and share its profits. LPs are made up of a general partner, an individual or company responsible for the day-to-day management of the business, and limited partners, the part-owners who contribute financial resources and then just simply sit back and collect their share of profit from the investment. The majority of hedge funds and private equity funds are structured as limited partnerships (LPs).

Because the general partner is responsible for overseeing the business and making decisions, they are fully liable for all the debts and liabilities that the partnership incurs, including lawsuits. The silent, limited partners, meanwhile, are only liable up to the amount of their investment, similar to shareholders in a publicly traded company.

Under the guidance of the general partner, LPs often invest capital into short-term projects and assets such as real estate. Because of the quick turnarounds of their trades, the sometimes illiquid nature of their holdings, the structure of these businesses, and the fact that they are usually formed for a predetermined length of time, LPs are required to disclose the anticipated holding period on assets in their prospectuses.

Benefits of Knowing the Anticipated Holding Period

Anticipated holding periods are useful to know for many reasons. Above all, they enable investors to identify when they will get paid back the capital they initially invested, as well as hopefully a profit. Before making an investment, an investor will have an idea as to what the expected returns will be; knowing this approximate number and the anticipated holding period can help with financial planning.

Holding periods serve a number of other useful purposes. For instance, they can be used to determine the taxing of capital gains or the total losses on assets. A long-term holding period is categorized by the Internal Revenue Service (IRS) as one year or more with no expiration. Any asset held under this period is taxed less favorably as a short-term gain.

Holding periods also help investors figure out a position’s returns and compare them between investments held for different periods of time. The total return on an investment during the time that it is held is known as the holding period return/yield. Expressed as a percentage, it factors in the income an investment generates, plus its change in value.

The formula looks like this:

Special Considerations

Before a broker recommends a potential investment to an individual, they should evaluate and disclose the selling firm's anticipated holding periods on underlying assets. The anticipated holding period on assets can impact how investments are graded and therefore how they are recommended to customers. For example, the anticipated holding period on underlying assets can affect the share classes of mutual funds.

The Financial Industry Regulatory Agency (FINRA) enforces rules governing broker-dealers, including that they must have "reasonable grounds" for believing that a recommended transaction/investment is suitable for a customer based on their financial situation, needs, and investment objectives.