Hedge Fund Seeding Enhancing Returns in a Low Yield Environment
Executive Summary Section 1 - An Introduction to Seeding / Acceleration Section 2 - Industry Trends Industry Growth Prospects Increasing Barriers to Entry Number and Quality of Fund Launches Scarcity of Early Stage Capital Benefits to being an Early Stage Investor Co-Investment Hedge Fund Revenues Growth in Acceleration Opportunities
CO-INVESTMENT Over the past few years there has also been a significant increase in co-investing opportunities provided by managers. Early stage investors develop the relationships with managers which may provide access to participation in these co-investment opportunities. This approach can provide access to a manager’s best ideas as well as taking a more concentrated position in these ideas than a manager may be willing or able to take in the comingled fund. It is also used by some investors as a means of decreasing the overall cost ratio of investing with a manager, as management fees (and possibly performance fees) associated with co-investments are often much lower than the comingled fund. In the case of a seed investor this is typically a contractual right built into the seeding agreement.
HEDGE FUND REVENUES The alternatives industry accounts for over 30% of industry revenues despite comprising only 12% of the asset management industry assets7. It would be reasonable to expect that the higher margins available would attract competition with a resulting margin compression.
Improving Exit Opportunities
Section 3 - The Seeding / Acceleration Capital Model Conclusion Appendix A
There has been much written about the compression of fees in hedge funds and the institutionalisation of the industry has certainly resulted in a lowering of fees since 2008. However, perhaps surprisingly given the level of media attention in this area, our experience, supported by a number of industry surveys, suggests that fees have settled in a range of 1.50%-1.55% for management fees and 17.5%18% for performance fees, which represents only a 5% decrease in levels over the past 5 years. Chart 10. Average Hedge Fund Fees (2010-2015) Performance Fees
Management Fees
Appendix B
Industry
1.65%
19.00% 18.71%
1.60% 1.57%
Appendix C
1.56%
1.55%
Important Disclosures
Industry
New Launches 18.54%
18.27%
18.50%
1.54% 1.51%
1.50%
New Launches
17.80% 17.70%
18.00%
1.50% 17.50%
1.45%
17.00%
1.40%
16.50%
1.35% 1.30% 2011
2012
2013
2014
2015
16.00% 2011
2012
2013
2014
2015
Source: HFR
One might expect there to be greater fee pressure on emerging managers, with most managers offering founder class and early bird discounts for early stage investments. However, according to Hedge Fund Research, “for the vintage of funds launched in 2015, the average management fee was IRR 1.625.0% percent, an increase of 3 bps over the vintage of 2014 launches, while the average incentive fee for22.5% 2015 launches increased to 17.75 percent, an increase of 40 bps over funds launched in 2014”8. 20.0% as more institutional investors focus on emerging managers we believe that there will be However, 17.5% continued pressure to discount fees more aggressively in start-up phase, making these managers 15.0% more reliant on performance fees in order to be profitable while they are small. 12.5% 10.0% 7.5% 5.0% 2.5%
This document is for professional investors only and should not be relied upon by private investors. Please refer to important disclosures at the end of this paper.
JUNE 2016
0.0% -2.5%
7 8
Standard Investor Seed (Low AUM Raise) Seed (Medium AUM Raise) McKinsey & Company: Trillion-Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investments, 2014 Seed (HighThe AUM Raise) Additional Return (Medium Case) HFR Hedge Fund Market Microstructure Report for Fourth Quarter 2015
16% 14%
36 Mth Rolling Net Return
Average Rolling Net Return14