Seward & Kissel 2016/17 Hedge Fund Side Letter Study

Driven by our ongoing commitment to understanding the dynamics of the hedge fund marketplace and bringing the latest industry color to our clients and friends, each year Seward & Kissel conducts various studies of the most important trends we are seeing impacting the hedge fund community. This year, for the second year in a row, we have conducted a study covering side letters negotiated by our hedge fund manager clients during the period July 1, 2016 through June 30, 2017 (the “Study”).

In our 2015/2016 Study, 87% of the side letters were with managers in business for two or more years at the time of execution (“Mature Managers”), and 13% were with managers less than two years old (“Newer Managers”), while the current Study showed a change to 80% of the side letters being with Mature Managers and 20% being with Newer Managers. Given the rising trend for side letters with Newer Managers, this Study, unlike the 2015/2016 Study, will also cover key data points on the Newer Managers. We believe, however, that the continuing underrepresentation by Newer Managers in this statistic is attributable primarily to the increase in the use of founders’ classes over the past several years which decreases the need for side letters with Newer Managers.

The Study is broken down into four parts: the Managers, the Investors, the Terms, and a newly added Comparison to Separately Managed Accounts. The four parts of the Study, when read together, provide valuable insights into the negotiation with hedge fund investors in the current environment.

Key takeaways