New funds imposing tougher redemption terms

26 Feb, 2014

Newly launched US hedge funds are imposing tougher redemption terms on investors although management fees have declined, according to a study by Seward & Kissel.

Eighty-nine per-cent of new funds restricted redemptions to a quarterly or longer-term basis in 2013 compared with 64% in 2012.  Just 11% permitted monthly redemptions in 2013, down from 36% in 2012.  The number of funds employing a hard lock-up, usually of one year, rose dramatically from 8% in 2012 to 27% in 2013.

Whether or not this represents a shift in the relationship between hedge funds and investors is unclear. Hedge funds posted their best returns since 2009 with the average manager enjoying gains of 8.7% last year, according to data from Hedge Fund Research. 

However, the study added that management fees had fallen, albeit marginally from 1.68% to 1.66% although performance fees continue to be pegged at 20%. The Seward & Kissel study also highlighted that funds pursuing non-equity related strategies usually charged a higher management fee. The mean management fee for non-equity hedge funds stood at 1.82% while the average equity focused hedge fund charged 1.58%.

“The spread in management fees between funds that employ equity-related strategies and those with non-equity strategies, as well as the move towards tightened liquidity, have been particularly interesting findings of this study.  The toughening of liquidity provisions may indicate that managers are making adjustments necessary to efficiently manage and maintain their portfolios,” said Steve Nadel, partner at Seward & Kissel.

Despite several years of underperformance, there has been little downward pressure on hedge fund fees. A Goldman Sachs survey of investors in 2013 found 83% of respondents paid full or non-negotiated fees. Sixty-eight per-cent of pension funds, historically the most vocal investor constituent on fees, paid full fees, according to the Goldman Sachs survey.

Seward & KisselGoldman Sachsfees