Seward & Kissel New Manager Hedge Fund Study Suggests Increased Demand for Non-Equity Strategies

Management Fees Declined for Equity Funds, Rose for Non-Equity Funds

In a challenging fundraising environment, new hedge funds have largely responded by lowering management fees, according to the 2024 edition of The Seward & Kissel New Manager Hedge Fund Study. Produced annually by the leading law firm to the private fund industry, the Seward & Kissel study reveals a bifurcation between new funds investing in equities, which offered more investor-friendly terms in 2024, and new funds featuring non-equity strategies, which came to market with higher fees than the prior year’s new entrants. The full Study is available here.

Over three quarters of new funds in 2024 featured equity-related strategies (77%), up slightly from 74% in 2023. These funds charged an average of 1.38% in standard (non-founders class) management fees, down from 1.48% in 2023. In contrast, the 23% of new funds featuring non-equity strategies displayed greater pricing power, with standard fees rising from 1.40% in 2023 to 1.75% in 2024. The Study found a similar divergence in the prevalence of lock-ups or investor level gates. The proportion of equity funds imposing these restrictions fell from 78% in 2023 to 72% in 2024, while for non-equity funds, the share rose from 71% in 2023 to 90% in 2024.

Both equity and non-equity funds displayed a strong preference for infrequent liquidity, with 95% of funds in each category limiting withdrawals to a quarterly (or less frequent) basis. This was in line with 2023 for non-equity funds, but it was an increase from the 74% of new equity funds offering infrequent liquidity in 2023.

Other key findings of The 2024 Seward & Kissel New Manager Hedge Fund Study include:

• There was a sizeable increase in the proportion of equity funds offering founders classes, from 49% in 2023 to 70% in 2024. Non-equity strategies saw only a modest rise, from 47% to 50%.
• Incentive allocation hurdles in equity funds nearly tripled in the two-year period from 2022 (15%) to 2024 (44%), as managers sought better alignment of interests with investors in bull market conditions.
• Standalone U.S. funds were less prevalent, falling from 68% in 2023 to 55% in 2024.

Commentary

Seward & Kissel Investment Management Group partner Nick Miller, the lead author of The 2024 Seward & Kissel New Manager Hedge Fund Study:

“In tough fundraising conditions, new equity fund managers are leaving no stone unturned, employing fee cuts and founders classes, and launching more offshore funds.”

“We believe that the high percentage of funds offering quarterly or less frequent liquidity indicates that a larger proportion of managers are finding success in attracting sticky capital that is willing to ride out recent periods of high volatility.”

“The jump in the number of funds offering founders classes may be partially attributable to the increased desire for upfront commitments to guarantee coverage of operational costs associated with running a hedge fund, putting pressure on managers to maintain a certain level of fees.”

Nick Miller is available to speak to the media about The 2024 Seward & Kissel New Manager Hedge Fund Study. The survey methodology and full report can be accessed here.

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 private fund and investment management work, having advised its first private fund in 1949, and having earned numerous best in class awards over the years.

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