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New hedge fund study shows seed activity, founders' share classes decline in 2019 launches

Wednesday, April 08, 2020

Laxman Pai, Opalesque Asia:

For the first time since 2013, the majority of newly-established hedge funds did not provide in their offering documents for founders' classes, which give special terms to early investors, said a study.

In 2019, only 44% of new hedge funds offered founders' classes, continuing a sharp downward trend from 68% in 2017 and 57% in 2018, according to The Seward & Kissel 2019 New Hedge Fund Study.

Among funds that did create founders' classes in 2019, a significantly smaller percentage offered discounts on management fees and incentive allocation rates.

Approximately 47% of funds using equity strategies and 38% of funds with non-equity strategies offered lower management fees or incentive allocation rates through their founders' classes. Those figures are down from 63% and 45%, respectively, in 2018.

Meanwhile, hedge funds also experienced a shift in seed investment activity. According to the study, the number of seed deals fell moderately in 2019, but the size of those deals trended higher.

Seward & Kissel data suggests that the higher end of seed deals fell in the $100-$200 million range, and typically included a two- to three-year lock-up.

"As institutional seed investors placed larger bets on a more selective basis, they increasingly competed to back premier managers. The dynamic suggests the continued emergence of a bit of a star system," said Steve Nadel, the lead author of The Seward & Kissel 2019 New H......................

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