Impact of the pandemic on hedge fund launches

“The pandemic has had a broad effect on launches initially and ongoing. Larger managers with existing investor relationships were incredibly active in launching new products, taking advantage of market dislocations,” observes Nick Miller, partner at Seward & Kissel.

However, for new managers just starting out, fund raising was difficult due to the uncertainty at the beginning of the pandemic. As the pandemic wore on, even by the end of 2020, investors were conducting due diligence electronically. As a result, the pace of new launches by new managers picked up dramatically, adds Miller.

Early indications for 2021 as a whole is that there were significantly more launches from new managers than in 2020.

Established large hedge funds are an excellent training ground for new launches. The largest launches in 2021 had previously worked at York Capital, Viking Global, Citadel, Moore Capital and Elliott Investment Management.

The manager’s pedigree helps a new manager raise assets. The parent firm’s prior employees’ successes and track record are perceived as a harbinger of what the new spin-off will provide.

Strategies

Fund launches generally follow performance. ?In 2021, many new launches focused on cryptocurrencies and digital assets. Some were stand-alone strategy product offerings while others incorporated digital assets as a complementary portion of the portfolio.?

The number of launches reflected the growing interest from institutional investors. The infrastructure is becoming institutionalized with more established exchanges, the emergence of digital custody solutions as well as specialized storage and security systems that safeguard assets. Regulatory clarity is expected to result in even more manager adoption.

Established hedge fund managers launching new crypto funds included Pantera Capital, SkyBridge, Valkyrie, Brevan Howard, Marshall Wace, Galaxy Capital, CrossTower, Graticule Asset Management, and Argentinum.

Miller also saw considerable fund launch activity related to funds focusing on private investments. He said: ?“Private equity presents a massive opportunity set as managers think about how to generate returns and alpha. With private companies delaying IPOs and considerable interest in global technology opportunities, the opportunity set in private equity is huge.”

As companies stay private longer, hedge fund managers want to be positioned to capture some of the alpha opportunities earlier, before the companies go public. They find that knowing about the companies earlier, informs their views and makes them better investors. It also diversifies their business and revenue sources. Managers are able to buy significant stakes relatively cheaply compared with their eventual IPO price when valuations may soar.?

More start-ups, that are spin-offs from established managers, are increasingly trading public and private markets. These include Franck Tuil’s Sparta Capital, Divvya Nettimi, Jay Kahn’s Flight Deck Capital, David Kroin’s Deep Track Capital, Malo Gaonkar’s Surgo Capital and Lisa Audet’s Tall Trees Capital.

Fees

According to HFR, in Q3 2021, the average management fee declined to 1.16%, which is slightly below the 2020 average for new launched at 1.24%. The average incentive fee for funds launched in Q3 2021 was 16.45%, below the Q2 2021 average of 17.0%.

“Fee compression has generally leveled out,” observes Miller. “Unique fee structures continue to gain prominence, including in some circumstances, hurdles on incentive compensation. We are also seeing management fee rates that scale down as AUM increases. These terms are still not the norm, however.”

Excerpt from the just-released White Paper: Launches, Spin-Offs and Seeding. Further details. Emerging Manager Emerging Manager Package

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