The Future of Hedge Funds Is Non-Equity Strategies

Last year saw the lowest proportion of new stock-oriented hedge funds since at least 2011, according to Seward & Kissel.

Only 56 percent of hedge funds started in 2017 by U.S.-based clients of asset-management law firm Seward & Kissel had equity or equity-related strategies, according to its annual hedge fund study released Tuesday. It was the first time since the study began in 2011 that there was near parity between newly created funds with stock strategies and those launched to make non-equity investments.

Steve Nadel, a partner in Seward & Kissel's investment management group and lead author of the study, attributed the "pendulum swing" away from long-short equity funds to the "strong long-biased bull run" in the stock market. In 2016, 65 percent of new hedge funds were equity-oriented, while 80 percent of funds launched in 2015 employed strategies tied to the stock market.

"It will be interesting to see whether a correction in equity prices due to rising interest rates and other macro factors will turn the tide," Nadel said in a statement accompanying the study.

Roughly half the non-equity hedge funds in the study were multi-strategy, with the rest split about evenly among credit, quantitative, commodity, cryptocurrency, and structured-product strategies.

These hedge funds were more likely than their equity-focused counterparts to offer lower fees to early investors through founders' classes, and less likely to employ lock-ups or gate provisions on redemptions. They were also more liquid: While nearly all stock funds allowed withdrawals on a quarterly basis, roughly a third of non-equity peers permitted monthly withdrawals.

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"Popularity doesn't come without a price," Nadel said in the statement. "With non-equity funds opening at a much higher rate, it is not surprising that larger numbers of them are offering incentives to attract investment."

The average management fee across all hedge funds launched in 2017 was 1.56 percent, while the typical performance fee was 19.25 percent.