Hedge Fund Strategies & Structure: 4 Stunning Graphics

Leading U.S. law firm, Seward & Kissel, released its 2012 edition of the “New Hedge Fund Study” last month. The study reflects data on newly formed hedge funds sponsored by U.S. managers, which have entered the market in 2012, and covers launches of Seward & Kissel’s new clients from 2012. The data reflects some important information and points that can be relevant for the hedge fund industry at large.

Investment Strategies

From the total of the funds included in the study, about 64% involved equity strategies, or strategies related to it, which is higher than the 50% in 2011. About 55% of equity or equity-related offerings were focused on the U.S and North American region, while the rest were more globally focused.

Incentive Allocations/Management Fees

Incentive allocation rates stayed at 20% of annual net profits. At the same time, there was a wider break-up among the funds in relation to management fees rates. The mean per annum rate edged down last year to 1.6875% per annum of net assets (compared to 1.71% in 2011) and the median rate was 1.75% per annum.

Liquidity

In 2012, more funds permitted monthly redemption, in comparison to the previous year. The percentage of these funds increased to 36% from 25% a year earlier. However, the number of funds with quarterly redemptions has decreased to 64% from 75% in 2011. At the same time, some of these funds, had lockups or gates, as illustrated in the graph below.

Structures

The study revealed that most offshore funds were located in the Cayman Islands. At the same time, sponsors who offered both U.S. and offshore funds set up over 80% of the time, master-feed fund structures. As it was already noticed in 2011, some managers who initially launched a U.S.-based standalone fund, were seeking to build a track record in order to attract offshore and U.S. tax-exempt investor interest. Additionally, in about 70% of the funds, the smallest initial investment was at about $1,000,000.

Founders, Seed or Other Strategic Capital

About 40% of funds, have obtained some form of founders, a number that remained unchanged from a year eariler. Founders are, in layman’s terms, early stage investors who get better fees in exchange for a lockup. Also, these funds have obtained seed capital, or some other type of strategic capital. The value of initial funding in big deals amounted to $75-150 million, while smaller deals benefited from amounts ranging between $10 million and $50 million.

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