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70% of new hedge funds launched in 2021 had equity or equity-related strategies

Thursday, April 14, 2022
Opalesque Industry Update, for New Managers - With the most severe obstacles to businesses imposed by the pandemic beginning to ease, both hedge fund investors and managers showed marked signs of confidence in alternative investments in 2021, according to The Seward & Kissel New Hedge Fund Study, an annual study of newly launched hedge funds.

The Study analyzes a series of metrics indicating optimism in the hedge fund industry.

Although the pandemic continued to present challenges in 2021, the Study showed that new managers began to overcome the fundraising hurdles prevalent in the pandemic's early stages. The hedge fund industry "was extremely active as participants were eager to take advantage of recent market opportunities" in 2021, the Study found.

The high demand for hedge fund strategies, it concludes, may have contributed to a recent trend: funds' collective resistance to fee compression. Management fees for funds with equity strategies held steady at 1.52% (compared to 1.51% in 2020) and rose to 1.66% for funds with non-equity strategies (up from 1.52% in 2020).

Other findings in the Study may also suggest an equilibrium has been met regarding alignment of interests between managers and investors. The share of funds with incentive allocation hurdles was 21% (up 10% from 2020), and the percentage of equity funds with lock-ups or gates decreased. In seed capital investment activity, the Study notes several emerging trends, including a heightened interest among seeders in hybrid and healthcare-focused strategies, which is a trend Seward & Kissel continues to see in the current launch market in 2022, according to Nick Miller, partner in Seward & Kissel's Investment Management Group and lead author of the Study.

"The strong appetite among seeders for hybrid fund structures is unsurprising given the increasing conversations we are having with both new managers and established managers about "hybrid" or public/private products today. It's a natural extension that seeders would be interested in these types of funds," said Miller. "We expect hybrid structures generally to continue as a growing trend in 2022, as well as investments targeting industries such as healthcare, tech, and digital assets, all of which we've seen significant interest in in the new launch space this year."

Other Key Findings Include:

• 70% of new hedge funds launched in 2021 had equity or equity-related strategies, up slightly from 66% in 2020.

• Incentive allocation rates in standard classes across all strategies averaged 20% of annual net profits (up slightly from 19% in 2020), while approximately 21% of all funds had an incentive allocation hurdle (up from 10% in 2020).

• Sponsors of both U.S. and offshore funds continued to almost exclusively set up master-feeder structures (as opposed to side-by-side structures), and used the Section 3(c)(7) exemption 75% of the time.

"For new managers and those in the early stages of launching a fund, The Seward & Kissel New Hedge Fund Study provides practical and actionable intelligence on their peers, as well as the demands of investors," Miller added.

(press release Bg)

The full Study is available here:

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