New Hedge Fund Study

2019 Edition

Prepared by the Investment Management Group, Seward & Kissel LLP
Originally published in the April | May 2020 issue

Driven by our ongoing commitment to understanding the dynamics of the hedge fund marketplace and bringing the latest industry color to our clients and friends, each year Seward & Kissel conducts The Seward & Kissel New Hedge Fund Study of newly-formed hedge funds sponsored by new US-based managers entering the market. This Study covers the 2019 hedge fund launches of relevant Seward & Kissel clients meeting these criteria. As we have recently been identified by Preqin as the top US law firm based on number of hedge funds serviced, we believe that the number of funds within the Study is large enough to extract a representative sample of important data points that are relevant to the hedge fund industry. The Study analyzes investment strategies, incentive allocations/management fees, liquidity and structures, as well as whether any form of founders or seed capital was raised. The Study does not cover managed account structures or “funds of one” that tend to have a wider variation in their fee arrangements and/or other terms.

The Study’s key findings, set forth in greater detail below, include the following:

  • 70% of the funds had equity or equity-related strategies, up from 63% in 2018.
  • With respect to management fees charged in the standard (i.e., non-founders) classes, the average rate was 1.43% for equity strategies (down slightly from 1.44% in 2018) and 1.68% for non-equity strategies (up from 1.58% in 2018).
  • Incentive allocation rates in standard classes increased slightly across all strategies by about 26 basis points from 2018 to an average of 18.98% of annual net profits. In addition, approximately 15% of all funds had an incentive allocation hurdle (down slightly from 2018 but virtually the same as 2017).
  • Approximately 47% of the equity funds (down from 63% in 2018) and 38% of the non-equity funds (down from 45% in 2018) offered lower management fee and/or incentive allocation rates through their founders classes.
  • 89% of the equity funds (down slightly from 95% in 2018) and 88% of the non-equity funds (up significantly from 55% in 2018) offered quarterly (or less frequent) withdrawals, with the balance allowing for monthly withdrawals.
  • Similar to 2018, lock-ups or investor level gates were used by 79% of the equity funds and 75% of the non-equity funds, with 16% of the equity funds including both. Fund level gates have continued to be disfavored by both new managers and investors.
  • Sponsors of both US and offshore funds continued to almost exclusively set up master-feeder structures (as opposed to side-by-side structures), and utilized the Section 3(c)(7) exemption 67% of the time.
  • Overall, seed investment activity was down moderately in 2019. However, the size of seed investment amounts trended higher, with a number of new launches attracting seed investments of well over $100 million.
  • Looking back five years to 2014, there have been noticeable changes in both the fee and liquidity terms of newly-formed funds.

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