Seward & Kissel New Hedge Fund Study Shows Shifting Terms with Early Investors

April 7, 2020

For the first time since 2013, the majority of newly-established hedge funds did not provide in their offering documents for founders’ classes, which give special terms to early investors, according to The Seward & Kissel 2019 New Hedge Fund Study, the oft-cited annual analysis of new hedge fund terms and structures undertaken for nearly a decade by the leading law firm to the hedge fund industry. In 2019, only 44% of new hedge funds offered founders’ classes, continuing a sharp downward trend from 68% in 2017 and 57% in 2018. The full study is available here.

Among funds that did create founders’ classes in 2019, a significantly smaller percentage offered discounts on management fees and incentive allocation rates. Approximately 47% of funds using equity strategies and 38% of funds with non-equity strategies offered lower management fees or incentive allocation rates through their founders’ classes. Those figures are down from 63% and 45%, respectively, in 2018.

Meanwhile, hedge funds also experienced a shift in seed investment activity. According to the study, the number of seed deals fell moderately in 2019, but the size of those deals trended higher. Seward & Kissel data suggests that the higher end of seed deals fell in the $100-$200 million range, and typically included a two- to three-year lock-up.

Other Key Findings Include:

  • The share of funds with equity-related strategies rose to 70% in 2019, up from 63% in 2018.
  • Non-equity funds became more stringent in their withdrawal policies: 88% of non-equity funds offered withdrawals on a quarterly or less frequent basis (as opposed to a monthly basis), up from 55% in 2018.
  • Average incentive allocation rates (18.98%) across all strategies stayed fairly constant in 2019, as did management fees for funds with equity-based strategies (1.44%). Management fees for non-equity-based funds rose from 1.58% to 1.68%.


Seward & Kissel Investment Management Group partner, Steve Nadel, the lead author of The Seward & Kissel 2019 New Hedge Fund Study:

“The decrease in founders’ classes was a bit surprising. Factors at play here could include more side letters and bespoke products, as well as a rise in high-demand launches.”

“As institutional seed investors placed larger bets on a more selective basis, they increasingly competed to back premier managers. The dynamic suggests the continued emergence of a bit of a star system.”

“The stability of management fees and incentive allocation rates in 2019 suggests, among other things, that fund pricing is reaching its floor.”

“For new managers and those in the early stages of launching a fund, The Seward & Kissel 2019 New Hedge Fund Study provides practical intelligence on their peers, as well as on the demands being made by investors.”