Emerging managers have tightened liquidity, Seward & Kissel study finds

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A new report from Seward & Kissel has highlighted a shift in hedge fund portfolio dynamics, amidst ongoing economic uncertainty, towards longer-held positions, with new managers tightening liquidity rules into 2022 as a result. 

The Seward & Kissel New Manager Hedge Fund Study, an annual analysis of new manager hedge funds, reveals that hedge fund terms regarding withdrawal frequency, investor-level gates, and so-called “hard lock-ups” all trended toward limiting liquidity last year. 
The share of funds limiting withdrawals to a quarterly (or less frequent) basis rose to 91% in 2022, up from 81% five years ago. The increased restriction was most marked among funds employing non-equity strategies, with only 55% of such funds limiting withdrawals to a quarterly basis in 2018, while 93% did so last year. 

Other important liquidity terms also followed the trend. In 2021, just 21% of all funds employed both investor-level gates (restricting the amount an investor may redeem at any given time) and lock-ups (prohibiting investors from withdrawing capital for a stated term). In 2022, that doubled to 42%. Among standard classes of equity funds, the use of investor-level gates leapt from 18% in 2021 to 60% in 2022.

The trend towards greater liquidity constraints was not, however, as pronounced for more established managers. This year, for the first time, Seward & Kissel – which represents approximately half of the top 100 hedge funds based on assets under management – conducted a parallel study of new funds launched by established investment managers (those with a longer track record and larger AUM). 

The forthcoming Seward & Kissel Established Manager Hedge Fund Study found that, among other things, quarterly liquidity, as well as soft lock-ups and/or gates was present in about 25% of the funds with traditional hedge fund strategies, and was even less restrictive among short-term income-focused bespoke strategies funds (of which 75% offered monthly liquidity). 

Besides some strategy differences, Seward & Kissel believes that the liquidity differences between new manager and established manager funds is partly attributable to the fact that the established manager funds are not flagship offerings and therefore their managers are less sensitive about maintaining fund asset levels to run the overall firm.

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