Despite all the disruption of 2020, there was a fair degree of consistency with past yearsA recent study of the hedge fund market, by Seward & Kissel Investment Management Group, finds that even with the volatility of the pandemic, the market remains surprisingly stable. Access the report here.
April 29, 2021 — NEW YORK–(BUSINESS WIRE)–While the early part of 2020 was challenging for new hedge fund managers, equity launches in particular were big gatherers of capital as the year progressed, according to The Seward & Kissel New Hedge Fund Study, an annual study of newly launched hedge funds. That conclusion harmonizes with other market research performed throughout the pandemic by Seward & Kissel, a leading law firm to the private fund industry.
Despite heightened volatility and a sense of stress in the market brought on by the pandemic, certain characteristics of the hedge fund industry remained consistent with past years, the Study suggested. In the continuation of a trend, new hedge funds with equity-based strategies remained in high demand relative to those with non-equity-based strategies. Equity-based funds accounted for 66% of all funds in the Study. Likewise, a greater proportion of non-equity funds (60%, up from 38% in 2019) than equity-based funds (53%, up from 47%) offered discounted management fees or incentive allocation rates (or both) through founders classes to help attract a base of starting capital.
The findings in the Study are consistent with other recent data collected by Seward & Kissel, such as allocators’ appetite for established, well-tested managers early on in the pandemic. However, allocators became more comfortable with the remote diligence process as the pandemic continued, expanding their perspectives and becoming more accepting of a wider pool of managers. Seward & Kissel’s recent Alternative Investment Allocator Survey indicated that 80% of investors do invest in managers founded less than two years ago, and of the most sought-after strategies in 2021, equity hedge were most popular among the open-ended strategies.
Other Key Findings Include:
- Seed deals decreased overall in 2020, in another apparent reflection of the pandemic’s impact on activity in the first half of the year.
- Average management fees for standard (non-founders) classes increased for funds with equity-based strategies (to 1.51%, from 1.43% in 2019) and decreased for funds with non-equity-based strategies (to 1.52%, from 1.68%).
- Similar to 2019, lock‑ups or investor-level gates were used by 79% of the equity funds and 70% of the non-equity funds, with 5% of all funds including both.
- Incentive allocation rates in standard classes across all strategies averaged 19% of annual net profits, virtually the same as in 2019.
Seward & Kissel Investment Management Group partner Steve Nadel, the lead author of The Seward & Kissel New Hedge Fund Study:
“The pandemic made 2020 a year unlike any other in the hedge fund industry. But for all the disruption, there was a fair degree of consistency with past years. We saw relatively stable numbers, for instance, in incentive allocation rates, lock-ups, and the share of funds using equity-based strategies.”
“The fact that investors could not conduct on-site due diligence during most of 2020 had a dramatic impact on capital raising beyond merely lengthening the sales cycle. As in other industries, the biggest players were at a great advantage, but that effect has eroded and new entrants seem to have gained a foothold.”
“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.”
About Seward & Kissel LLP
Seward & Kissel LLP, founded in 1890, is a leading U.S. law firm with an international reputation for excellence. The firm is particularly well known for its hedge fund and investment management work, having established the first hedge fund ever, A.W. Jones, in 1949, and having earned numerous best in class awards over the years. In addition, Preqin recently identified Seward & Kissel as the top U.S. law firm based on number of hedge funds serviced.