Where Baby Hedge Funds Come From

A recent study finds that a significant number of hedge funds launched last year received seed capital, but no new fund sought investments through advertising.

The study by Seward & Kissel, a law firm, found that some 40% of 2013 hedge fund rollouts greater than $75 million (about 15% of all fund launches) obtained seed capital.

In addition, 43% of funds in the study had some form of founders' capital.

The study said prominent new firms entered the seeding arena in 2013, joined by several smaller opportunistic one-off investors, such as family offices and high-net-worth individuals.

Seed investments in many of the bigger deals tended to be in the $75 million to $150 million range, typically with a two- to three-year lockup. Smaller deals, usually with less well-known managers, generally attracted seed capital in the $10 million to $50 million range.

No fund in the study engaged in general solicitations and advertising, which is now permitted under the JOBS Act by Securities Act Rule 506(c).

Seward & Kissel said its study covered the 2013 hedge fund launches sponsored by U.S.-based managers that were its clients. It said the number of funds was “large enough to extract a representative sample of important data points that are relevant to the hedge fund industry.”

Other Findings

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.

First Take: Snowden the hero geek at SXSW

AUSTIN — They came for a rock star, but got a slow motion tech geek.

Edward Snowden, patriot, traitor, hero hacker, runaway spy — take your pick — unveiled himself to the friendliest U.S. constituency he could find Monday as the tech industry's scruffy elite flocked to the Austin Convention Center to see him live from Russia at South by Southwest.

Sporting a short-cropped haircut and blue collar shirt and coat, with the shadowy makings of a mustache and chin beard, Snowden appeared on two giant screens to wild applause with a copy of Article 1 of the Constitution emblazoned on a green screen behind him.

"We the People" framed his headshot, though a poor video connection through Google Hangout and several server bounces from Russia turned the crowd's hero into more of a Saturday Night Live character, his face contorted in frozen video expressions as the audio ran. Tongue out, eyes rolled, mouth open. The embarrassing frames accompanied his hour-long chat with hosts Ben Wizner and Chris Soghoian of the American Civil Liberties Union.

The crowd, clad in requisite hoodies, jeans, ponytails and plaid shirts, clutching mobile devices overwhelmed by the conference's wireless traffic, streamed into the airplane hangar-like Exhibit Hall 5 for more than two hours before the 11 a.m. CT session. As Snowden appeared, photographers raced the aisles trying to get a decent shot of the scourge of the NSA without the frozen expressions.

But the biggest problem wasn't the connection. It was the discussion itself. Far from a ringing indictment of the U.S. government's snooping policy, or of the role of whistleblowers in keeping the public informed, the talk quickly devolved into a dissertation on encryption techniques and global network structures.

Snowden dutifully made his case that the government had crossed the line, in his mind, by moving from a defensive surveillance and electronic protection strategy to an offensive data snatch-and-attack policy. He argued it has also been co! mpletely ineffective in protecting us.

"We spent all this money, all this time, hacking into Google to see their databases, and what did we get? We got nothing." He said attacks like the Boston bombings might have been prevented if the authorities spend more time chasing leads and less time grabbing metadata.

Twenty-five minutes into the session though, the excitement of seeing him live had begun to wear off. A trickle of people in the audience made their way for the door. When a tweeted question about how users could protect themselves was answered with a suggestion they adopt "full disk encryption" and the TOR routing network, the trickle became a stream.

There were moments of applause. Six of them actually, including a half-hearted attempt at a standing ovation at the end, with a smattering of folks rising to their feet, as Snowden did his best to finish on a patriotic note.

"I took an oath to defend the Constitution and I saw the Constitution had been violated on a massive scale," he explained in a final answer to a question about why he did what he did. By then the crowd was well on its way to the next session, or to the lunch bars of Austin's famed 6th Street.

Snowden had made tech history again, and furthered South by Southwest's claim to the top tech gathering event of the year. He also revealed the tech geek behind the hero, patriot, or traitor. A complex young man caught in the swirl of history, but one this crowd could now better understand as one of their own.