23/06/23

INVESTMENT: Hedge funds fees vary according to strategy, says new study

As published on: hedgeweek.com, Thursday 22 June, 2023.

A new study of new hedge funds launched by established managers from private funds industry law firm Seward & Kissel, reveals a sharp divergence in the management fees charged depending on investment strategy. 

The first-ever Seward & Kissel Established Manager Hedge Fund Study is an analysis of new hedge funds and new classes of funds launched by established managers within their existing businesses. It finds that new funds pursuing traditional investment strategies charged an average management fee of 1.9%, while the funds pursuing bespoke investment strategies charged an average management fee of .925%. 

The two types of funds diverged not only in management fees but also in their incentive allocations. Traditional-strategy funds consistently set their incentive allocation at 20%, while bespoke strategies had an average rate of 16.5%. About one-third of bespoke-strategy funds used a “1 or 20” compensation structure, paying them the greater of a 1% management fee or 20% incentive allocation.

This study is a companion to the Seward & Kissel's long-running New Manager Hedge Fund Study, an annual analysis of hedge funds launched by new managers which launched in 2011. 

The study defines “established-manager funds” as new hedge funds or classes of existing funds overseen by investment managers who have been in business for more than five years and have more than $1 billion in regulatory assets under management. Among that universe of funds, the study found a roughly even split between those employing traditional strategies and those using bespoke strategies that seize on the current high interest rate environment, such as income funds, defensive funds, and inflection funds.

The study, a companion to Seward & Kissel's long-running New Manager Hedge Fund Study, an annual analysis of hedge funds launched by new managers, which was first published in 2011, also found that established-manager funds employing bespoke strategies, which were more short-term and income-focused in nature, offered shorter withdrawal terms and fewer liquidity restrictions. Among such funds, 75% offered monthly liquidity.

Founders classes meanwhile, were not used by any funds using traditional strategies, and only one-third of funds using bespoke strategies. By contrast, more than half of the funds analyzed in the latest Seward & Kissel New Manager Hedge Fund Study (59% of equity funds and 53% of non-equity funds) employed founders classes.

Among funds pursuing traditional strategies, long/short funds represented 40%, macro funds represented 40%, and equity/debt strategies accounted for 20%.

Slightly more than half of the funds studied were standalone US funds with no offshore equivalent.

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Hedge Funds Investment