Hedge funds are allowed to advertise for investors under the JOBS Act, but none of the new US hedge funds in a recent Seward & Kissel LLP study actually did so (the annual study is restricted to new funds), opting for founder capital and seed money instead. At least 40% of launches over $75 million had some amount of seed money, with a 2 – 3 year lockup on seed money being typical, and 43% of all funds in the study had some founders’ capital. Seed money ranged from $10 million to $150 million depending on the size of the deal and the manager’s reputation.
Most new funds had $1 million minimum investment
Part of the reason hedge funds didn’t bother with advertising is that most people simply aren’t eligible to invest with them. Only 10% of new funds had a minimum payment under $1 million (still $250,000 or more), while 70% required at least a $1 million investment and 20% set a $5 million minimum. While the JOBS Act lets funds advertise to the general public, they still have a responsibility to ensure that investors are qualified (eg have enough money to responsibly invest), so blanket advertising probably isn’t the best way to connect with the hedge funds’ target audience.
Performance fees remained pegged at 20% of net annual profits, but average management fees fell from 1.6875% in 2012 to 1.663% last year. Funds that follow equity strategies (65% of new funds) had lower management fees: 1.58% compared to 1.835% for non-equity strategies. The overall average fell because the gap between equity and non-equity strategy fees narrowed slightly. A high watermark provision was in place in every new hedge fund in the Seward & Kissel study, and 8% of funds had some form of modified high watermark, hurdle rate, or multi-year performance metric.
New hedge funds looking for one-year lock-ups
Hedge funds offered less liquidity last year, with 88% offering quarterly or even less frequent redemptions. Only 11% allowed monthly redemptions compared to 36% in 2012, and 62% offered some sort of incentive (such as reduced management fees) for investors who agreed to lock-ups of one year or more. Hedge funds that used a soft lock-up rose from 50% in 2012 to 58% in 2013, with a 2% – 4% redemption fee during the first year being typical, and hard lock-up provisions jumped from 8% in 2012 to 27% last year.