New hedge funds move away from monthly liquidity in 2013
New hedge funds offered by new US-based managers are making their investors wait longer to redeem holdings, according to the Seward & Kissel New Hedge Fund Study.
The ability of new hedge funds to impose heightened restrictions on investor liquidity suggests a potential shift in the relationship between hedge funds and investors.
In 2013, 89 per cent of new funds (as compared to 64 per cent in 2012) restricted redemptions to a quarterly or longer-term basis, representing a 25 per cent rise. Just 11 per cent of funds allowed monthly redemptions in 2013, compared to 36 per cent in 2012.
Consistent with this trend, the number of funds employing “hard lock ups” (usually one year in length) rose a dramatic 19 per cent, from eight per cent in 2012 to 27 per cent in 2013.
While the above numbers may indicate that hedge funds enjoyed increased leverage over investors during the 2013 market rebound, management fee levels tell a somewhat contrasting story. The average management fee fell slightly in 2013, to 1.663 per cent from 1.688 per cent, with the median fee holding at 1.75 per cent. As in 2012, the management fee numbers revealed a distinction between funds pursuing equity-related strategies and those pursuing non-equity strategies. Funds with non-equity strategies again imposed higher management fees, although the rate disparity between the strategies narrowed as the mean management fee for non-equity-strategy funds decreased by 0.125 per cent to 1.825 per cent from 1.95 per cent, while the mean management fee for equity strategy funds decreased less.
Overall, 65 per cent of funds used equity-related strategies in 2013. That number is similar to the 2012 figure (64 per cent), and continues the rise from 2011 when funds were split evenly between equity-related and non-equity strategies.
Across all funds, 43 per cent received some form of founders capital. The management fees imposed on founders class investors was, on average, 30 basis points lower than those imposed on flagship classes, and the average incentive allocation was 16.1 per cent.
Sponsors of both US and offshore funds set up master-feeder structures over 90 per cent of the time. Most offshore funds were established in the Cayman Islands, although other jurisdictions (e.g. Bermuda and Bahamas) sought to re-establish their respective presences in the industry.
Steve Nadel, partner and co-head of Seward & Kissel’s investment management practice and lead author of the study, says: “The spread in management fees between funds that employ equity-related strategies and those with non-equity strategies, as well as the move towards tightened liquidity, have been particularly interesting findings of this study. The narrowing of the average management fee disparity between equity and non-equity strategies that we saw this year could indicate that non-equity hedge funds are offsetting the higher overhead generally required to implement their strategies through technological and other efficiencies. The toughening of liquidity provisions may indicate that managers are making adjustments necessary to efficiently manage and maintain their portfolios.”