Digital Assets Report


Like this article?

Sign up to our free newsletter

New hedge fund study shows funds placing premium on strong start

Related Topics

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 per cent 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 USD100-USD200 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 USD3.8 million in 2018, as compared to USD1.8 million for funds with equity-based strategies (an increase of 90 per cent and 39 per cent, 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 per cent for equity strategies, 1.58 per cent for non-equity strategies) as well as the share of funds that allow withdrawals on a quarterly or less frequent basis (95 per cent of equity funds, 55 per cent of non-equity funds).

In 2018, incentive allocation rates decreased by 53 basis points from 2017 and 100 basis points from 2016 to an average of 18.72 per cent per year.

Funds using equity or equity-related strategies rebounded from a low of 56 per cent of funds in 2017 to constitute 63 per cent of funds in 2018.

Approximately 63 per cent of equity funds, and just 45 per cent of non-equity funds, offered discounted management fees or incentive allocations through their founders classes.
Seward & Kissel Investment Management Group partner, Steve Nadel (pictured), the lead author of The Seward & Kissel 2018 New Hedge Fund Study, says: “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 per cent 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.”

Like this article? Sign up to our free newsletter

Most Popular

Further Reading