Seward & Kissel’s 2023 New Manager Hedge Fund Study evaluates newly formed hedge funds sponsored by new U.S.-based managers entering the market. This Study covers the 2023 hedge fund launches of relevant Seward & Kissel clients meeting these criteria and analyzes investment strategies, incentive allocations/management fees, liquidity and structures, as well as whether any form of founders or seed capital was raised.
Key Findings:
- 74% of the funds had equity or equity-related strategies, slightly down from 76% in 2022.
- With respect to management fees charged in the standard (i.e., non-founders) classes, the average rate was 1.48% for equity strategies (up from 1.42% in 2022) and 1.40% for non-equity strategies (down from 1.67% in 2022).
- Incentive allocation rates in standard classes across all strategies averaged 18% of annual net profits (down from 18.75% in 2022). In addition, approximately 40% of all funds had an incentive allocation hurdle (a significant increase from 15% in 2022). 54.5% of hurdles were soft hurdles and 45.5% were hard hurdles.
- Approximately 49% of the equity funds (down from 59% in 2022) and 47% of the non-equity funds (down from 53% in 2022) offered lower management fee and/or incentive allocation rates through their founders classes.
- 74% of the equity funds (down from 88% in 2022) and 95% of the non-equity funds (up slightly from 93% in 2022) offered quarterly (or less frequent) withdrawals, with the balance allowing for monthly withdrawals.
- Lock-ups or investor level gates were used by approximately 78% of the equity funds (up from 69% in 2022) and 71% of the non-equity funds (up from 67% in 2022), with 35% of all funds including both (down from 42% in 2022). Of particular interest, the usage of investor level gates in the standard classes of equity funds in 2023 (53%) remained fairly consistent with 2022 (60%), which saw a significant increase from 2021 (18%).
- Sponsors of both U.S. and offshore funds continued to almost exclusively set up master-feeder structures (as opposed to side-by-side structures) and utilized the Section 3(c)(7) exemption 75% of the time (down from 87% in 2022). Sponsors launching with just a U.S. standalone fund in 2023 (68%) remained fairly consistent with 2022 (60%).
- Overall, hedge fund seed investment activity in 2023 (i.e., typically, where money is invested by an investor for a locked up time period in exchange for some sort of revenue share in the fees) was comparable to 2022. Institutional seeders remained fairly active, representing the majority of observed seeding activity.
- Looking back five years to 2018, fund terms regarding fees and liquidity have remained fairly consistent.
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