A rising number of newly launched hedge funds are employing non-equity-based investment strategies, according to The Seward & Kissel 2016 New Hedge Fund Study.
The portion of new hedge funds using non-equity-based strategies increased to 35 per cent in 2016, up from 20 per cent in 2015.
The 2016 numbers indicate that as non-equity funds become more prevalent, investors are beginning to extract from them concessions similar to those they have previously won from equity-based funds.
The percentage of non-equity funds offering special “founders” terms to investors jumped from 29 per cent in 2015 to 36 per cent in 2016, while the percentage of equity funds with such “founders classes” dropped from 82 per cent to 75 per cent over the same period.
Management fees charged to standard class members were down from last year, both for non-equity funds (1.43 per cent) and equity funds (1.51 per cent). Most strikingly, while not a single non-equity-based fund offered tiered management fees in their founders classes in 2015, 25 per cent of them did in 2016. Tiered management fees (which step down as fund assets grow, in recognition of efficiencies of scale) were offered by 40 per cent of equity funds this year, up just 5 per cent from last year.
The share of managers who launched a US fund without also offering an offshore fund rose to 40 per cent in 2016, up from 25 per cent in 2015. This is the latest and most dramatic evidence of a trend that began in 2012, in which managers are first establishing a track record with a US fund, and leveraging it to attract offshore investor interest later.
There was little deviation among funds with regard to liquidity-related terms. Nearly all funds – 94 per cent – permitted investors to make redemptions on a quarterly or shorter basis. Balancing that permissive approach to redemption frequency, every fund in the Study imposed some form of lock-up (which holds investor funds in for a minimum period of time), or investor level gate (which caps the amount that can be redeemed at one time).
Seward & Kissel estimates that a total of 25-30 seed deals were executed in 2016, down 25 per cent from 2015.
After a single fund introduced a tiered incentive allocation last year (which was a first for The Seward & Kissel New Hedge Fund Study), 20 per cent of equity funds with founders classes used a tiered incentive allocation in 2016.
Seward & Kissel Investment Management Group partner, Steve Nadel (pictured), the lead author of The Seward & Kissel New Hedge Fund Study, says: “The rising popularity of non-equity-based funds is the story of 2016. New fund managers obviously reacted to a big shift in investor appetites.
“Certain trends accelerated very rapidly this year, including the practice of starting US standalone funds without offshore counterparts and employing tiered incentive allocations. Meanwhile, it’s notable that the funds in the Study were unanimous in employing either a lock-up or an investor level gate. Greater information sharing and transparency could be driving a degree of herd behaviour.
“For new managers and those in the early stages of launching a fund, The Seward & Kissel New Hedge Fund Study provides practical intelligence on their peers, as well as on the demands being made by investors.”
