First-Ever Study of Established-Manager Funds Reveals Smaller Fees for New “Bespoke” Strategies

A new study of new hedge funds launched within established managers reveals a sharp divergence in the management fees charged by such funds depending on their investment strategies. The first-ever Seward & Kissel Established Manager Hedge Fund Study, from the leading law firm to the private fund industry, 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 full study is available here.

This first edition of the Seward & Kissel Established Manager Hedge Fund Study is a companion to the long-running and industry-leading Seward & Kissel New Manager Hedge Fund Study, an annual analysis of hedge funds launched by new managers. Seward & Kissel has produced that widely read study since 2011. The firm’s full suite of reports also now includes an annual report on side letters, the Seward & Kissel Hedge Fund Side Letter Study, and the Seward & Kissel Seed Transactions Deal Points Study, which was just released.

In its inaugural year, the Seward & Kissel Established Manager Hedge Fund 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 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.

Other key findings include:

• 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 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 our 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 U.S. funds with no offshore equivalent.

Commentary

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

“For investment managers at all levels of experience, the Seward & Kissel Established Manager Hedge Fund Study provides practical intelligence on the industry and how these managers are growing their asset bases, as well as on the demands being made by investors.”

“The difference in management fees between established funds employing traditional and bespoke strategies is dramatic but not unexpected, reflecting the fact that bespoke funds are much less alpha-focused.”

“While it’s surprising that so many funds from established managers were standalone U.S. funds without offshore equivalents, it’s likely that those funds are ‘testing the waters’ before expanding internationally.”

Nick Miller is available to speak to the media about the Seward & Kissel Established Manager Hedge Fund Study. The survey methodology and full report are accessible online 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 hedge fund and investment management work, having established the first hedge fund ever, A.W. Jones, in 1949, and having earned numerous best in class awards over the years. In addition, Preqin recently identified Seward & Kissel as the top U.S. law firm based on number of hedge funds serviced.

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