jp morgan prime brokerage 2013 hedge fund terms analysis

I N V E S T O R S E R V I C E S

Capital Introduction Group2013 Hedge Fund Terms Analysis

Executive Summary 1

Fund Age 2

Fund Size 3

Redemptions 4

Lock-Up Terms 8

Management and Performance Fees 11

New Launches and Founders Share Class 13

Contents

1

Figure 1:

Strategies of

Active Funds Credit, 29.49%

CTA/Managed Futures, 6.04%

Emerging Markets, 3.66%

Equity, 28.39%

Relative Value, 21.06%

Macro, 11.36%

The following is an overview for 2013 of basic fund terms across 546 of the funds that the Capital Introduction Group (“CIG”) actively works with. This analysis evaluates redemption terms, lock-up periods and fees across strategies. Given the consistency of our sample over recent years there are few significant changes to report. However, there has been some turnover of funds in addition to slight changes in the underlying terms of some funds. With regard to strategies, the percentage of funds within our sample focused on equity strategies has increased from 24.37% in 2012 to 28.39% in 2013.

Based on our analysis, hedge fund managers remain focused on matching the liquidity terms of their funds with those of the underlying strategies. Soft lock-up periods remain common as managers try to dissuade investors from investing for short periods of time.

With respect to fees, our analysis shows that, on average, management fees remain below the traditional 2.00% with a mean of 1.64% while the average performance fee has decreased to approximately 19.00% (from 19.40% in 2012). In addition to the broader fund terms analysis, we also looked at the fees associated with 68 funds that have launched since mid-2012. Of the 68 funds, 23 offered fee discounts to early stage investors via a founders share class. The mean management and performance fees associated with the founders share class were 1.37% and 15.07% respectively.

Executive Summary

2

CTA/Managed Futures funds have the longest running average track record of over 10 years. Figure 2 indicates that approximately 7% of funds in the study launched within the past year, while more than 22% of the funds in the study launched within the past 3 years (see Figure 3). The mean age of the funds included in this study is 7.92 years (see Figure 4).

Figure 2:

Age of Funds

Figure 3:

Fund Age

Figure 4:

Mean Age of

Funds (Years)

Age of funds (Years) PercentAge of funds

strAtegY Mean Max Min <1 year <2 years <3 years

Credit 6.62 27.29 0.00 2.75% 5.86% 9.34%

CTA/Managed Futures 10.13 30.70 0.62 0.37% 0.37% 0.73%

Emerging Markets 6.34 14.29 1.80 0.00% 0.18% 0.55%

Equity 8.41 28.20 0.00 2.75% 4.58% 5.49%

Relative Value 9.43 29.37 0.12 0.92% 1.83% 2.75%

Macro 6.60 20.70 0.54 0.37% 2.38% 3.30%

Total 7.92 30.70 0.00 7.14% 15.20% 22.16%

<1 Year, 7.14%

1-3 Years, 15.02%

3-5 Years, 15.02%

5-10 Years, 32.78%

>10 Years, 28.39%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Total

6.62

10.13

6.34

8.419.43

6.607.92

Credit CTA/ManagedFutures

EmergingMarkets

Equity RelativeValue

Macro

Fund Age

3

Fund Size

Despite continued growth of the hedge fund industry, many funds still face significant headwinds with regard to reaching the $1 billion mark. Within our analysis, 61% of the funds have AUM of $500 million or less, whilst over 75% have AUM of $1 billion or less. Only 3.7% of funds have in excess of $5 billion in assets.

Figure 5:

Fund Size (AUM)

<$50 million, 13.23%

$50-$100 million, 9.34%

$100-$500 million, 38.52%

$500 million-$1 billion, 14.40%

$1-$5 billion, 20.82%

>$5 billion, 3.70%

4

Redemptions

Figure 6 represents a breakdown of the redemption terms for the 546 funds in the analysis. Across the sample, the most common redemption term is Quarterly with a 90 day notice period (16% of all funds). Monthly redemptions with 30 days notice and Quarterly redemptions with 60 days notice are also amongst the most popular redemption terms (15% of all funds).

Investors and hedge fund managers alike continue to focus on ensuring that funds offer appropriate liquidity terms for their underlying strategies. Strategies such as CTAs, Macro and Equities continue to offer the most liquid terms, while Credit and some Emerging Markets funds employ less liquid terms. Interestingly, an increasing number of hedge fund managers are offering new products with liquidity profiles to fit products outside of their traditional hedge fund offering such as 40 Act and UCITS funds. Additionally, hedge fund managers are increasingly looking at investing in longer term opportunity sets by exploring the merits of hybrid funds that share characteristics of private equity and hedge fund structures.

Figure 6:

Redemption Terms

redemPtion terms PercentAge of funds number of funds

Daily below 15 days 1% 8

Monthly 30 days 15% 84




Monthly above 90 days 4% 21

Quarterly 30 days 5% 29





Semi-Annually 60 days 1% 3

Semi-Annually 90 days 1% 3

Annually 60 days 1% 7

Annually 90 days 3% 17

Annually above 90 days 1% 5

Monthly other 1% 8

Quarterly other 1% 5

Other 9% 49

Total 100% 546

5

Most common redemption terms by strategy33% of Credit funds and 15% of Relative Value funds offer quarterly redemptions with 90 days notice. These terms are consistent with the less liquid underlying positions that managers often hold across these strategies.

33% of CTA/Managed Futures, 24% of Equity and 21% of Macro funds offer monthly redemptions with 30 days notice. These redemption terms reflect the more liquid instruments these strategies generally utilize.

Figure 7:

Redemption Terms

by Strategy

monthlY QuArterlY

strAtegY 15 days

30 days

45 days

60 days

90 days

30 days

45 days

60 days

65 days

90 days

Other

Credit 0% 6% 3% 4% 4% 1% 6% 20% 4% 33% 19%

CTA/Managed Futures 9% 33% 6% 0% 0% 0% 0% 0% 0% 0% 51%

Emerging Markets 0% 15% 5% 5% 0% 0% 5% 15% 15% 10% 30%

Equity 3% 24% 7% 3% 1% 9% 14% 8% 1% 10% 19%

Relative Value 0% 9% 3% 3% 3% 6% 17% 26% 6% 15% 14%

Macro 8% 21% 10% 15% 3% 10% 6% 5% 2% 0% 21%

Total 2% 15% 5% 4% 2% 5% 10% 15% 4% 16% 21%


EmergingMarkets


Macro Total

Monthly 15 days Monthly 30 days Monthly 45 days Monthly 60 days Monthly 90 daysQuarterly 30 days Quarterly 45 days Quarterly 60 days Quarterly 65 days Quarterly 90 days

Other

0%

10%

20%

30%

40%

50%

60%

Figure 8:

Redemption Terms

by Strategy

6

Redemption Frequency51% of all funds in our analysis have quarterly liquidity (see Figure 9). However, this redemption frequency predominantly consists of Credit and Relative Value funds. Within our universe of Credit funds (including distressed, high yield, long/short, multi-strategy and structured), 64% employ quarterly redemption terms, whilst in Relative Value strategies, almost 70% of all funds have quarterly redemptions.

Key Redemption DatesFigure 10 outlines key redemption deadlines by which Investors must submit their redemption notices over the coming months/quarters depending on the redemption terms of the fund. 20% of funds included in the study have redemption frequencies of quarterly, semi-annually or annually with 90 days notice.

Figure 9:

Redemption

Frequency Daily, 5%

Weekly, 1%

Monthly, 33%

Quarterly, 51%

Semi-Annually, 2%

Annually, 7%

Other, 1%

Redemptions CONTINUED

7

redemPtion freQuencY notice dAYs redemPtion dAte redemPtion cut-off dAte

M 90 4/30/2014 1/30/2014

M 65 4/30/2014 2/24/2014

M 60 4/30/2014 3/1/2014

M 45 4/30/2014 3/16/2014

M 30 4/30/2014 3/31/2014

M 90 5/31/2014 3/2/2014

M 65 5/31/2014 3/27/2014

M 60 5/31/2014 4/1/2014

M 45 5/31/2014 4/16/2014

M 30 5/31/2014 5/1/2014

M 90 3/31/2014 21/31/2014

M 65 3/31/2014 1/25/2014

M 60 3/31/2014 1/30/2014

M 45 3/31/2014 2/14/2014

M 30 3/31/2014 3/1/2014

Q 90 3/31/2014 12/31/2014

Q 65 3/31/2014 1/25/2014

Q 60 3/31/2014 1/30/2014

Q 45 3/31/2014 2/14/2014

Q 30 3/31/2014 3/1/2014

Q 90 6/30/2014 4/1/2014

Q 65 6/30/2014 4/26/2014

Q 60 6/30/2014 5/1/2014

Q 45 6/30/2014 5/16/2014

Q 30 6/30/2014 5/31/2014

Figure 10:

Key Redemption

Dates

The redemption calendar is an approximation based upon “Calendar days” notice periods, and does not account for those redemption cut-off days that fall on a non-business day.

8

Lock-Up Terms

Hedge funds often institute lock-ups to reduce the amount of turnover that occurs within their respective investor base. Figure 11 indicates that over 71% of Credit funds incorporate a lock-up provision into their basic terms, while almost 50% of funds across all strategies include a lock-up period of some description. This concentration of Credit funds with a lock-up is consistent with the more onerous redemption terms of this strategy versus that of other more liquid strategies such as CTAs. Interestingly, more than 40% of Equity and Macro funds institute either hard or soft lock-ups as part of their basic terms, despite the fact that they are often able to liquidate their holdings in relatively short order.

Hard versus Soft Lock-UpsAlmost 40% of all Credit funds include a hard lock-up provision whilst almost 20% of Equity and Relative Value focused funds include a hard lock-up period (see Figure 12). The mean hard lock-up period across all strategies is 1.05 years (see Figure 13).

Figure 11:

Percentage of Funds

with Lock-Ups

0%

10%

20%

30%

40%

50%

60%

70%

80%

Total

71.43%

3.03%

30.00%

41.94% 40.87% 40.32%47.44%


EmergingMarkets


Macro

Figure 12:

Percentage of Funds

with Hard Lock-Ups


EmergingMarkets


0%

10%

20%

30%

40%

50%

Macro Total

39.13%

0.00%

10.00%

19.35% 18.26%

6.45%

21.98%

9

Approximately 32% of Macro and Credit funds offer soft lock-ups (see Figure 14). Almost 25% of funds in our analysis include a soft lock-up provision. The mean soft lock-up period across strategies is approximately 1 year (see Figure 15).

Figure 13:

Mean of Hard

Lock-Ups (Years)


EmergingMarkets


0.00

0.20

0.40

0.60

0.80

1.00

1.20

Macro Total

1.03

0.00

0.50

1.131.05 1.06 1.05

Figure 14:

Percentage of Funds

with Soft Lock-Ups


EmergingMarkets


0%

10%

20%

30%

40%

Macro Total

31.68%

3.03%

20.00%22.58% 21.74%

32.26%

24.91%

10

Soft lock-ups are included in redemption terms to both potentially deter investors from redeeming early and to enable a manager to cover costs of liquidating positions unexpectedly. The mean early redemption fees associated with these soft lock-ups is shown in Figure 16.

The average soft lock-up fee is 3.58%, with a range of 1% to 6%. In practice, despite the large percentage of funds that include lock-up provisions in their basic terms, it should be noted that many investors will attempt to negotiate waivers or reduced terms. This is particularly relevant with regard to soft lock-ups, which fund managers will on occasion agree to waive, especially when the fund is invested in liquid instruments or an investor is making a sizeable allocation.

Figure 15:

Mean of Soft

Lock-Ups (Years)


EmergingMarkets


0.85

0.90

0.95

1.00

1.05

1.10

Macro Total

0.981.00 1.00

0.93

1.06

1.00 0.99

Figure 16:

Mean Soft

Lock-Up Fees


EmergingMarkets


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Macro Total

3.98%

5.00%

4.10%

3.30% 3.30% 3.24%3.58%

Lock-Up Terms CONTINUED

11

Management and Performance Fees

Management fees vary slightly across strategies. In this sample, Equity funds tend to charge the lowest management fees on average while CTAs and Emerging Markets funds have the highest average management fees. The traditional fee of 2% remains the most common management fee across strategies with the exception of both Equity and Emerging Markets focused funds which most commonly charge 1.5% (see Figure 19).

Figure 17:

Mean Management

Fees


EmergingMarkets


1.40%

1.50%

1.60%

1.70%

1.80%

1.90%

Macro Total

1.65%

1.80%1.83%

1.57%1.62%

1.67%1.64%

Figure 18:

Mean Performance

Fees


EmergingMarkets


17.50%

18.00%

18.50%

19.00%

19.50%

20.00%

Macro Total

19.08%

19.70%

19.05% 19.16%18.93%

18.39%

18.99%

12

With respect to performance fees, the mean across all strategies is approximately 19%. The range of management fees is 0%-3%, while performance fees range from 0%-35%. Almost 90% of all funds within Credit, Equity and Relative Value strategies charge performance fees of 20%.

It should be noted that these fees are based on the official fund terms. Both management and performance fee reductions may be negotiated by investors in certain circumstances, such as in return for offers of large allocations or for agreeing to commit their investment for an extended period beyond the standard liquidity terms.

Additional instances of fee breaks often occur at the beginning of a manager’s life cycle. Increasingly hedge fund managers are offering discounted share classes to early stage investors. These “founders share classes” often offer capacity rights or require an investment within a specified time frame from fund inception.

strAtegY meAn mAx min mode mode%

Credit 19.08% 20.00% 0.00% 20.00% 86.96%

CTA/Managed Futures 19.70% 30.00% 0.00% 20.00% 84.85%

Emerging Markets 19.05% 30.00% 0.00% 20.00% 75.00%

Equity 19.16% 25.00% 0.00% 20.00% 88.39%

Relative Value 18.93% 25.00% 0.00% 20.00% 87.83%

Macro 18.39% 35.00% 0.00% 20.00% 77.42%

Total 18.99% 35.00% 0.00% 20.00% 85.90%

Figure 19:

Management Fees


Credit 1.65% 2.00% 0.50% 2.00% 42.24%

CTA/Managed Futures 1.80% 3.00% 0.00% 2.00% 63.64%

Emerging Markets 1.83% 3.00% 1.00% 1.50% 40.00%

Equity 1.57% 2.25% 0.35% 1.50% 38.71%

Relative Value 1.62% 2.00% 0.50% 2.00% 42.61%

Macro 1.67% 2.50% 0.25% 2.00% 56.45%

Total 1.64% 3.00% 0.00% 2.00% 42.12%

Figure 20:

Performance Fees

Management and Performance Fees CONTINUED

13

New Launches and Founders Share Classes

Using a sample of 68 new launches that CIG has worked with over the past 18 months, the average management fee is 1.65% and the average performance fee is 19.24%. Of the 68 funds that launched within the past 18 months, Credit and Equity funds have been the most common, accounting for 76% of the funds.

Of the 68 funds in the sample, 23 launched with a founders share class to incentivize investors to invest early in the fund. Of the 23 founders share classes, 4 were offered with a defined timeframe for investment, while 13 offered a founders share class based on a specified assets under management (“AUM”) capacity. 6 funds included both timeframe and capacity limits. 7 of the 10 funds with defined timeframes chose to limit access to the share class to 6 months or less. The capacity limits of funds in the sample ranged from $100 million to $500 million. The most common capacity limit was $100 million.

The Figures 23-28 illustrate the differences between founders share class fees and those applicable to the standard share classes in this sample of 23 new launches that offered a founders share class. The mean management fee of the founders share classes is 1.37% compared to the standard share class mean of 1.79%.

Figure 21:

Strategies of

New Launches

Credit, 44%

Equity, 32%

Relative Value, 9%

Macro, 10%

CTA/Managed Futures, 5%

Figure 22:

Founders Share

Class AUM Capacity

$100million

$150million

$200million

$250million

$300million

$500million

0

1

2

3

4

5

6

7

Num

ber o

f Fun

ds

14

The mean performance fees for the founders share class and the standard share class are 15.07% and 19.65%, respectively. The range of founders share class performance fees in this sample is 10% to 20%.


Credit 1.32% 1.75% 1.00% 1.50% 45.45%

Equity 1.33% 2.00% 1.00% 1.00% 33.33%

Relative Value 1.50% 1.50% 1.50% 1.50% 100.00%

Macro 1.50% 1.50% 1.50% 1.50% 100.00%

Total 1.37% 2.00% 1.00% 1.50% 52.17%


Credit 1.73% 2.00% 1.00% 2.00% 54.55%

Equity 1.63% 2.00% 1.50% 1.50% 66.67%

Relative Value 2.00% 2.00% 2.00% 2.00% 100.00%

Macro 2.00% 2.00% 2.00% 2.00% 100.00%

Total 1.79% 2.00% 1.00% 2.00% 56.52%

Figure 23:

Mean Management

Fee (Founder vs

Standard)

Credit Equity Relative Value Macro Total Average1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

1.32% 1.33%

1.63%

1.50%

2.00%

1.50%

1.37%

1.79%

2.00%

1.73%

Founders Management Fee Standard Management Fee

Figure 24:

Founders

Management Fees

Figure 25:

Standard

Management Fees

New Launches and Founders Share Classes CONTINUED

15

There are a variety of term combinations associated with founders share classes. Terms may include basic management and/or performance fee discounts, declining fee structures associated with increases in AUM, and/or the offering of zero fee investments in perpetuity once a fund has reached a pre-defined critical mass.

CIG anticipates that there will be continued utilization of founders share classes as the asset raising environment for recently launched managers continues to be highly competitive.

Figure 26:

Mean Performance

Fees (Founder vs

Standard)

Credit Equity Relative Value Macro Total Average10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

14.77%15.50%

19.67%

15.33%

20.00%

15.00% 15.07%

19.65%20.00%20.00%

Founders Management Fee Standard Management Fee


Credit 14.77% 20.00% 10.00% 15.00% 63.64%

Equity 15.50% 17.00% 15.00% 15.00% 66.67%

Relative Value 15.33% 16.00% 15.00% 15.00% 66.67%

Macro 15.00% 15.00% 15.00% 15.00% 100.00%

Total 15.07% 20.00% 10.00% 15.00% 69.57%

Figure 27:

Founders

Performance Fees

STRaTEgy MEaN Max MIN MOdE MOdE%

Credit 20.00% 20.00% 20.00% 20.00% 100.00%

Equity 19.67% 20.00% 18.00% 20.00% 83.33%

Relative Value 20.00% 20.00% 20.00% 20.00% 100.00%

Macro 20.00% 20.00% 20.00% 20.00% 100.00%

Total 19.65% 20.00% 15.00% 20.00% 95.65%

Figure 28:

Standard

Performance Fees

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