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73% of Hedge Funds Rolled Out in 2014 Were Equity-Related

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Seventy-three percent of hedge funds launched by new U.S. managers last year had equity or equity-related strategies, according to the latest hedge fund study by Seward & Kissel, a law firm with offices in New York and Washington, D.C.

This compared with 65% of new funds with equity strategies in the 2013 study.

About 14% of the funds were multi-strategy/macro offerings, and the balance comprised credit, CTA and other strategies.

The new study was designed to analyze strategies, incentive allocations and management fees, and liquidity and structures, and to determine whether any form of founders or seed capital was raised.

Seward & Kissel emphasized that the 2014 study did not cover managed account structures or “funds of one” that may have a wider variation in their fee arrangements and/or other terms.

The study found that hedge fund incentive fees continued to be set at 20% of net profits across all strategies. However, the past disparity in management fee rates between equity and non-equity strategies essentially disappeared, and averaged out at about 1.7%.

The report noted a major development in the fee arena: 19% of funds in the study (all equity funds) implemented a management fee rate that tiered down to lower rates as assets surpassed certain benchmarks.

Eighty-one percent of new funds in 2014 permitted quarterly or even less frequent redemptions, down from 89% in 2013, while 19% allowed monthly redemptions, up from 11% the year before.

Moreover, as in 2013, 85% of all funds had some form of lock-up or gate.

Sponsors of both U.S. and offshore funds set up master-feeder structures more than 95% of the time, generally using the Section 3(c)(7) exemption.

The report said most offshore funds last year were established in the Cayman Islands, but other jurisdictions, such as Bermuda, began to re-establish their presence in the industry.

Approximately 70% of the funds in the study set their stated minimum initial investment at $1 million. About 10% had a minimum of $250,000, and 20% set theirs at $5 million or more.

The report said no fund in the study engaged in general solicitations and advertising as is now permitted under Securities Act Rule 506(c) promulgated pursuant to the Jumpstart Our Business Startups (JOBS) Act.

Sixty-five percent of funds studied obtained some form of founders’ capital, compared to 43% in 2013.

Seward & Kissel estimated, based on its conversations with various industry participants, that at least 40% of all rollouts greater than $75 million within the entire hedge fund industry last year had some form of seed capital.