Seward & Kissel Study: Continued Flight From Equity Among New Funds

Mar 13 2018 | 12:41pm ET

A dramatic reshaping of the hedge fund landscape continued in 2017, as the percentage of new funds employing equity-based strategies fell significantly for the second year in a row, according to the Seward & Kissel 2017 New Hedge Fund Study.

The study, which surveys U.S.-based funds that were set up in 2017,offers an annual analysis of new hedge funds performed by the leading law firm to the hedge fund industry.

The 2017 Study marks the first time since 2011 that the number of non-equity-related funds has approached parity with equity-based funds. In a trend first observed last year, as the demand for non-equity funds increases, many of the managers of such funds have moved to lock in capital quickly, mainly by granting management fee and incentive allocation concessions to their early investors, similar to those previously offered by equity-based funds.

Other key findings from the 2017 Study include:

  • Average management fees in standard (non-founders) classes held stable at 1.52% for equity strategies and ticked up from 1.43% to 1.61% for non equity strategies. 
  • Incentive allocation rates in standard classes decreased across all strategies by about 75 basis points to an average of around 19.25% of annual net profits.
  • Lock ups or investor level gates were used by just 66% of the non-equity funds, as compared to 91% of the equity funds (27% of which instituted both lock-ups and gates).

 “The pendulum swing towards non-equity funds and away from long/short equity-based funds keeps going. We believe this is primarily attributable to the strong long-biased bull run we have seen. It will be interesting to see whether a correction in equity prices due to rising interest rates and other macro factors will turn the tide,” Steve Nadel, the lead author of the Seward & Kissel New Hedge Fund Study, commented in a statement.

Founded in 1890, Seward & Kissel LLP is a U.S. law firm well known for its hedge fund and investment management work. The firm currently has the largest hedge fund market share among U.S. law firms according to Preqin’s Special Report.

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