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Seward & Kissel New Hedge Fund Study Shows Funds Placing Premium on Strong Start
[April 03, 2019]

Seward & Kissel New Hedge Fund Study Shows Funds Placing Premium on Strong Start


Hedge funds established in 2018 undertook concerted efforts to launch their enterprises on a stable foundation, including raising minimum investment levels significantly over prior years, according to The Seward & Kissel 2018 New Hedge Fund Study, an annual analysis of new hedge funds performed by the leading law firm to the hedge fund industry. In 2018, higher asset levels were sought in order to manage increasing costs and better attract institutional capital. From 2017 to 2018, the minimum investment accepted by new hedge funds shot up dramatically. The full study is available here.

In further evidence of the industry's emphasis on day-one capital, study data and market intelligence gathered by Seward & Kissel indicates that the number of seed deals rose by 20 percent in 2018. The increase in seed deals demonstrates new fund managers' desire to get substantial - and patient - dollars in the door, with typical seed lock-ups in the two- to three-year range. The higher end of seed deals remained in the $100-$200 million range.

The increase in minimum investment levels was particularly visible for funds pursuing non-equity strategies. Among so-called section 3(c)(7) funds, the minimum investment for non-equity funds reached $3.8 million in 2018, as compared to $1.8 million for funds with equity-based strategies (an increase of 90 percent and 39 percent, respectively). A growing disparity between the two types of funds could be seen in other metrics as well,suggesting an understanding in the market that non-equity funds typically demand greater resources to operate. In 2018, the divide grew in management fees (1.44 percent for equity strategies, 1.58 percent for non-equity strategies) as well as the share of funds that allow withdrawals on a quarterly or less frequent basis (95 percent of equity funds, 55 percent of non-equity funds).



Other Key Findings Include:

  • In 2018, incentive allocation rates decreased by 53 basis points from 2017 and 100 basis points from 2016 to an average of 18.72 percent per year.
  • Funds using equity or equity-related strategies rebounded from a low of 56 percent of funds in 2017 to constitute 63 percent of funds in 2018.
  • Approximately 63 percent of equity funds, and just 45 percent of non-equity funds, offered discounted management fees or incentive allocations through their founders classes.

Commentary


Seward & Kissel Investment Management Group partner, Steve Nadel, the lead author of The Seward & Kissel 2018 New Hedge Fund Study:

"Equity funds are better represented this year, but the market is increasingly treating equity and non-equity funds distinctly. The numbers suggest a continuing demand for non-equity funds which often require more resources to manage and thus have higher minimums."

"Pricing pressure has increased with respect to incentive allocations. Along with downward pressure on the rate itself, we witnessed the return of incentive allocation hurdles, which appeared in 20 percent of all funds. This trend will be something to watch going forward."

"For new managers and those in the early stages of launching a fund, The Seward & Kissel 2018 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 2018 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. In addition, Preqin recently identified Seward & Kissel as the top U.S. law firm based on number of hedge funds serviced.


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