Audit holdback provisions allow a fund to retain a portion of a withdrawing investor’s redemption proceeds for a period of time – typically until the fund’s annual audit is completed – to guard against adjustments to the fund’s net asset value (NAV) after the investor has redeemed.  However, when establishing an audit holdback, a hedge fund manager must carefully balance the overall liquidity of the underlying investments and the likelihood of subsequent adjustments to the NAV against the interests of investors and market practice.  This article, the second in a two-part series, discusses the prevalence of holdbacks in the hedge fund industry; investor response to these provisions; and considerations for hedge fund managers in crafting audit holdback terms.  The first article analyzed the mechanics of audit holdbacks; considered common variables found in such provisions; and evaluated potential alternatives to audit holdback structures.  For more on holdbacks, see “The Evolution of Offshore Investment Funds (Part One of Three): In Interview with Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Drafting of Offshore Fund Documents; NAV Adjustments; Clawbacks; Managed Accounts; and Payment-in-Kind Provisions,” Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).