NEW YORK--(BUSINESS WIRE)--Newly launched hedge funds continued to entice investors with management fee discounts while simultaneously tightening restrictions on redemptions, according to The Seward & Kissel 2015 New Hedge Fund Study, an annual study of new hedge funds by the leading law firm to the industry. The full study, which points to a new balance in negotiating power between the funds and their deep-pocketed investors, is available here.
The 2015 findings reflect a give-and-take between hedge funds and investors. On the one hand, they show the continuation of a trend in which hedge funds are willing to incentivize investors to join their founders classes, offering discounted fees, and sometimes tiered management fees that step down as fund assets grow. On the other hand, hedge funds further tightened their redemption rules.
In 2015, 35% of funds using equity-based strategies offered tiered management fee discounts in their founders classes, as compared to 25% in the 2014 study. The tiered management fee structure recognizes efficiencies that can be gained with scale, while incentivizing investors to contribute “day one” capital. While this suggests a sensitivity to investor concerns, an increasing percentage of funds allowed investors to make redemptions only on a quarterly or even less frequent basis, with 88% employing such policies in 2015, up from 81% in 2014. Moreover, the percentage of funds implementing some form of lock-up or gate also increased by 3% to 88% in 2015.
The latest study also reveals a new trend with respect to seed deals. In the still-challenging capital-raising environment of 2015, while 68% of new funds launched with some form of founders capital, seed deals also grew in popularity among allocators. Seed deals, which have become prevalent since the recession, historically have been well-publicized transactions involving well-known players. However, based on internal data and conversations with industry insiders, Seward & Kissel estimates that 35 to 45 seed deals—many of them unpublicized, one-off, opportunistic plays by lower profile investors—were executed in 2015.
A trend in which an increasing percentage of hedge funds are employing equity-related strategies continued in 2015. The study found that 80% of funds used equity-related strategies, up from 73% in 2014 and 65% in 2013. The increase has been a major story in the industry over the last three years, and many are keeping an eye on whether this has been driven by uncertainty over the Federal Reserve’s action on interest rates, which could especially impact funds using credit strategies.
Additionally, the pre-existing disparity in management fee rates between funds using equity and non-equity strategies resurfaced again, after nearly vanishing in 2014. Funds with equity strategies imposed management fees about 12 basis points higher than those using non-equity strategies, which reversed the trend of prior years where equity strategies had been lower historically.
Other Key Findings of the Study Include:
- 82% of all funds using equity strategies implemented founders classes.
- Incentive allocation rates generally continued to be set at 20% of net profits across all strategies for the flagship class, and for the first time in the study, a single hedge fund used a tiered incentive allocation.
- Once again, no fund within the study chose to engage in general solicitations and advertising as now permitted under new Securities Act Rule 506(c) pursuant to the JOBS Act.
Commentary
Seward & Kissel Investment Management Group partner, Steve Nadel, the lead author of The Seward & Kissel New Hedge Fund Study:
“The 2015 study reveals a more even balance of power between hedge funds and investors. More funds found it necessary to lure initial investors with reduced fees, but at the same time, investors understood that many strategies warranted a longer redemption cycle.”
“The jury is out on how the Federal Reserve’s historic interest rate increase will impact fund strategies moving forward. However, anecdotally, we’ve begun to see an uptick in debt-driven funds starting in 2016, and we’re hearing chatter in the market that there is an increased appetite for credit-driven strategies.”
“For new managers and those in the early stages of launching a fund, The Seward & Kissel 2015 New Hedge Fund Study provides practical intelligence on their peers, as well as on the demands being made by investors.”
Steve Nadel is available to speak to the media about The Seward & Kissel 2015 New Hedge Fund Study. The survey methodology and full report are accessible online here.
About Seward & Kissel LLP
Seward & Kissel LLP, founded in 1890, is a leading U.S. law firm with an international reputation for excellence. The firm is particularly well known for its hedge fund and investment management work, having established the first hedge fund ever, A.W. Jones, in 1949, and having earned numerous best in class awards over the years. The firm currently has the largest hedge fund market share among U.S. law firms according to CogentHedge.com.
