Where Baby Hedge Funds Come From

The study found that 65% of new funds examined deployed equity or equity-related strategies, about the same as in the firm's 2012 study.

Of the remaining non-equity funds, about 12% were multistrategy/macro offerings, approximately 8% were credit or CTA strategies and the rest consisted of other strategies.

Management fees were on average higher for non-equity strategies than for equity ones: 1.825% versus 1.58% (down from 1.95% and 1.67% in the 2012 study). This rate differential, Seward & Kissel said, was due primarily to the higher overhead typically needed to implement many non-equity strategies.

Incentive allocation rates continued to be pegged at 20% of net profits across all strategies, according to the data.

The study found that 89% of funds permitted quarterly or even less frequent redemptions, while only 11% allowed monthly redemptions in 2013 — down from 36% of funds in 2012. Moreover, 85% of all funds had some form of lock-up, up from 58% in 2012.

Sponsors of both U.S. and offshore funds set up master-feeder structures more than 90% of the time, generally utilizing the Section 3(c)(7) exemption.

Most offshore funds were established in the Cayman Islands, although other jurisdictions, such as Bermuda and the Bahamas, sought to reestablish their respective presences in the industry, according to the study.

In addition, the stated minimum initial investment was set at $1 million in approximately 70% of the funds. Ten percent of the funds had a $250,000 minimum, and 20% of the funds required a hefty $5 million or more.