The 2014 edition of the Seward & Kissel New Hedge Fund Study examines the strategy, structure, fees, liquidity and capitalization of new U.S.-based hedge funds that launched last year. Of note, the study does not include managed account structures or “funds of one” that frequently have greater variation in their fee arrangements and/or other terms.

Investment strategies for new hedge funds

Hedge Funds

Most new U.S, hedge funds started last year focused on an equity-related strategy. Just over 73% of the funds in the Seward & Kissel study utilized an equity or equity-related strategy. This percentage is up 8% from 2013. Of the remaining 27% of funds in the study, 14% of the funds were multi-strategy/macro offerings, and the rest were credit, CTA and other strategies.

Incentive allocations and fees

Hedge Funds

The study noted that for “hedge fund flagship classes (i.e., the standard classes typically charging a 20% incentive allocation and a 1.5%-2% management fee), incentive allocation rates continued to be set at 20% of annual net profits.” Of note, every fund had some type of high water mark provision. Just 7.4% of the funds had a modified high water mark provision (with a 200% makeup provision that tiered up to 225-250%, if the loss was not recouped after year one), but none of the funds had a hurdle rate or an incentive allocation measured across several years.

In terms of management fees, the disparity seen in the past between equity and non-equity strategies had largely disappeared, as the average rate across all strategies came together at 1.7% (a tic up from the 2013 average rate of 1.663%), with equity strategies increasing 12 basis points from 2013 and non-equity strategies dropping 12 basis points.

These fee reductions are related to operational efficiencies implemented by non-equity firms coupled with greater demand for equity strategies. Lastly, and arguably most importantly, 19% of all funds in the study (consisting of 25% of all equity funds and no non-equity funds) established a management fee rate scaled down to lower rates as assets surpassed performance metrics.

Liquidity

Hedge Funds

Hedge Funds

81% of funds permitted quarterly or even less frequent redemptions (as compared to 89% in 2013), while 19% of funds permitted monthly redemptions in 2014 (as compared to 11% in 2013). Moreover, as in 2013, 85% of all funds had some form of lock-up or gate.

Structure

The 2014 Seward & Kissel new hedge fund report also notes that sponsors of both U.S. and offshore funds established master-feeder structures more than 95% of the time, typically based on the Section 3(c)(7) exemption. Moore, the large majority of offshore funds were based in the Cayman Islands, but a few other areas such as Bermuda had funds set up operations in their country.

Hedge Funds

Of note, not a single new hedge fund in the study chose to engage in general solicitations and advertising per under Securities Act Rule 506(c), authorized to the JOBS Act.