Rise of Non-Equity Funds Is Hedge Fund ‘Story of 2016’: Seward & Kissel

Thirty-five percent of hedge funds rolled out last year employed non-equity-based investment strategies, up from 20% in 2015, according to a new study by Seward & Kissel, a law firm.

“The rising popularity of non-equity-based funds is the story of 2016,” Steven Nadel, the study’s lead author, said in a statement. “New fund managers obviously reacted to a big shift in investor appetites.”

The study found that as non-equity funds become more prevalent, investors are beginning to demand concessions from them similar to those they previously received from equity-based funds.

Thirty-six percent of non-equity funds launched in 2016 offered special “founders” terms to investors, compared with 29% of new funds in the 2015 report. Founders classes generally require a higher minimum investment.

In contrast, equity funds with founders classes went the other way, with 75% making these offers, down from 82% that did so in 2015.

The study showed that management fees charged to standard class members by both equity and non-equity funds were down last year: to 1.51% and 1.43%, respectively.

And whereas no non-equity-based funds offered tiered management fees in their founders classes in 2015, 25% of them did so in 2016. As well, 40% of equity funds offered tiered management fees last year, up from a mere 5% in 2015.

Tiered management fees go down as fund assets rise, in recognition of efficiencies of scale, the study said.

And in what Seward & Kissel called “a very hot trend to keep an eye on going forward,” 20% of equity funds with founders classes used a tiered incentive allocation in 2016. In the previous year’s study, only a single fund did so.

New research released by Citco and HFM Global found that 72% of hedge fund managers were implementing new fee structures in response to investor pressure.