Some 64 per cent of new hedge fund funds covered by a recent study carried out by Seward & Kissel had equity or equity-related strategies, up 14 per cent from the 2011 study.
Driven by the firm’s commitment to understanding the dynamics of the hedge fund marketplace, Seward & Kissel conducts an annual hedge fund study of newly formed hedge funds sponsored by new US-based managers entering the market each year.
Of the 64 per cent of new funds involved in equity or equity-related strategies, Seward & Kissel found that about 55 per cent were focused on US and North American equities and approximately 30 per cent had a sector focus, with the most popular sector focuses being healthcare and TMT.
Given the still rather challenging capital-raising environment that existed in 2012, the survey reveals that around the same percentage of funds as in 2011 – about 40 per cent – obtained some form of founders, seed, or other type of strategic capital. Of the funds studied, the 2012 environment saw a dip in allocations made by the largest “seed capital” investors, though this decrease was made up for to a degree by a continuing entry into the marketplace by a number of new seeders.
Generally, incentive allocation rates continued to be pegged at 20 per cent of annual net profits, according to the New Hedge Fund Study. However, the study reveals a wider spread in management fee rates compared to the firm’s 2011 findings. In 2012, there was a big difference in management fee rates charged based on strategies employed, with only 33 per cent of equity strategies charging two per cent per annum, but 90 per cent of all non-equity strategies charging two per cent per annum. The mean per annum rate also decreased slightly in 2012 to 1.6875 per cent per annum of net assets from 1.71 per cent in 2011.
The stated minimum initial investment was set at USD1,000,000 in about 70 per cent of the new funds analysed, with some outlier funds having a stated minimum of USD250,000 on the low end and USD5,000,000 on the high end. Following the trend first revealed in the 2011 study, there continued to be a number of managers who initially launched only a US standalone fund most often to build a track record in order to attract offshore and US tax-exempt investor interest in the future.
Steve Nadel (pictured), partner in Seward & Kissel’s investment management practice and lead author of the Seward & Kissel New Hedge Fund Study, says: “The Seward & Kissel New Hedge Fund Study is just one of the many ways that our firm seeks to provide not just legal advice, but real world industry colour, to our clients. The data we have presented is particularly compelling for new managers, especially in what is still a very challenging capital raising environment. In order to increase the odds of long-term success, new managers today must be cognizant of what investors are demanding and what competing managers are doing. We believe that the study is an important practical tool that new managers will utilise when making key decisions concerning the launch of their businesses.
"We were particularly surprised about the results relating to the differences in management fee rates depending on strategies employed, as well as the increase in equity-focused launches."