The number of new hedge funds limiting investor withdrawals to quarterly rose to 91% last year, according to findings from the newly released Seward & Kissel New Manager Hedge Fund Study.
The 2022 figures are up from 81% of managers with quarterly or less frequent lock-ups five years ago. Non-equity strategies were more likely to restrict withdrawals. According to the New York-based law firm, however, non-equity strategies represented only 24% of the fund launches in 2022.
“The recent uptick in investor-level gates and hard lock-ups could be attributable to a particularly high demand for alternative investment strategies with longer liquidity profiles,” said Nick Miller, partner in the Seward & Kissel Investment Management Group and author of the study.
The withdrawal notice period for equity funds was 30 days 4% of the time, 60 days 54% of the time, 90 days 19% of the time, and 45 days 23% of the time. The notice period for non-equity funds was 60 days 63% of the time and 90 days 37% of the time. The average notice period was 63.53 days (up from 50.66 days in 2021) broken down as an average of 61 days for equity funds and 75 days for non-equity funds.
Seed activity within historical norms
Overall, hedge fund seed investment activity in 2022 (i.e., typically, where money is invested by an investor for a locked-up time period in exchange for some sort of revenue share in the fees) was comparable to 2021. Institutional seeders remained fairly active, representing the majority of observed seeding activity, according to the study. The trend of longer lockups among more established managers has not changed in recent years, they added.
For the first, Seward & Kissel — which represents approximately half of the top 100 hedge funds based on assets under management — conducted a parallel study of new funds launched by established investment managers (those with a longer track record and larger AUM). The research found that the liquidity differences between new manager and established manager funds is partly attributable to the fact that the established manager funds are not flagship offerings and therefore their managers are less sensitive about maintaining fund asset levels to run the overall firm.
“An interesting finding this year was the high percentage of managers launching only in the U.S.,” added Miller. “That phenomenon in part reflects a strategy among new managers to build a track record first, upon which they can attract offshore and U.S. tax-exempt investor interest in the future and we believe is indicative of the ever-challenging fundraising environment.”
Other key findings
- The share of managers who launched with just a U.S. standalone fund rose to 60%, up from 39% in 2021.
- The share of funds with equity-related strategies rose six percentage points to 76% in 2022, nearing the study’s high-water mark of 80% from 2015.
- Management fees for standard classes declined 10 basis points for funds using equity strategies, to 1.42%.