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, an annual study of new hedge funds by the leading law firm to the hedge fund industry.
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% of new funds (as compared to 64% in 2012) restricted redemptions to a quarterly or longer-term basis, representing a 25% rise.
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Just 11% of funds allowed monthly redemptions in 2013, compared to 36% in 2012. Consistent with this trend, the number of funds employing "hard lock ups" (usually one year in length) rose a dramatic 19%, from 8% in 2012 to 27% 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% from 1.688%, with the median fee holding at 1.75%.
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 .125% to 1.825% from 1.95%, while the mean management fee for equity strategy funds decreased less (i.e., by .090% to 1.58% from 1.67%).
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By GlobalDataOverall, 65% of funds used equity-related strategies in 2013. That number is similar to the 2012 figure (64 percent), and continues the rise from 2011, when funds were split evenly between equity-related and non-equity strategies.
Across all funds, 43% 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%.
Other Key Findings of the Study Include:
- Only 11% of funds permitted monthly redemptions in 2013 as compared to a substantially higher 36% of funds in 2012, while 89% of funds allowed quarterly or less frequent redemptions.
- 27% of funds contained "hard lock ups" (usually one year in length) in 2013, as compared to just 8% the previous year.
- Maintaining a trend from 2012, 65% of funds had equity or equity-related strategies.
- Management fees were on average higher for non-equity strategies (although not as high as in 2012), while incentive allocation rates continued to be pegged at 20% across all strategies.
- Management fees for founders classes were, on average, 30 basis points lower than those charged for flagship classes.
- Some form of founders capital was contributed to 43 percent of funds, and Seward & Kissel estimates that at least 40% of all launches greater than US$75 million (and 15% of all fund launches) had some form of seed capital.
- Sponsors of both US and offshore funds set up master-feeder structures over 90% of the time. Most offshore funds were established in the Cayman Islands, although other jurisdictions (e.g., Bermuda, 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 Seward & Kissel New Hedge Fund Study: "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.
"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."
