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The study also revealed that most-favored-nation clauses continue to be the most commonly used term in side letters.

The Seward & Kissel 2018/19 Hedge Fund Side Letter Study indicates that funds of funds received just 37% of all side letters. That figure has dipped substantially from last year's study, in which they accounted for half of side letters, and the 2016/17 study, in which they accounted for 56%.

Funds of funds have been replaced in part by government pension plans, which received 19% of side letters this year, up from 7%. With regard to the terms used in side letters, this year's study tells a tale of continuity rather than change.

Last year, most-favored-nation clauses overtook fee discounts to become the most popular term. That result held again, with 48% of all side letters insisting that the investor receives the best terms that the fund has to offer.

The study also suggests that a sharp decline in fee discount clauses observed in last year's Side Letter Study may have been an aberration. Specific findings on this and other issues include:

- The percentage of side letters including fee discount clauses leapt from just 24% last year to 44% this year. That result equals the finding from two years ago, indicating that fee pressure may be back in earnest.

- While most-favored-nation clauses were the most popular, they fell seven points from last year, when they appeared in 55% of side letters. The study revealed, however, that newer hedge fund managers (those whose funds have been operating for two years or less) are demanding MFN protection now more than ever. MFN clauses appeared in 90% of side letters with newer managers, up sharply from 67% last year.

- Government retirement plans were considerably better represented in hedge fund side letters this year as compared to last, perhaps reflecting a hunt for large returns to satisfy pension obligations. Their 19% share, however, still does not equal the 27% share they received three years ago.

- Corporate pension plans received 14% of side letters, up from less than 5% last year.

"Our fourth Side Letter Study has again unearthed valuable insights into the continued evolution of hedge funds and their investors," said Kevin Neubauer, a senior associate at Seward & Kissel and lead author of the study. "The Seward & Kissel 2018/19 Hedge Fund Side Letter Study demonstrates strategic choices being made by hedge fund managers and their investor base alike."

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