Emerging Hedge Funds Pivot to Non-Equity Strategies Amid Equity Fee Compression

The fundraising landscape for emerging hedge fund managers is very competitive. Allocators are more selective and prefer unique strategies with better structural alignment. While equity strategies continue to dominate the volume of new fund launches, managers pursuing non-equity approaches, particularly credit, macro, and other diversifying strategies, are demonstrating stronger pricing power and greater success securing long-term capital commitments.

These findings were recently highlighted in Seward & Kissel’s 2024 New Manager Hedge Fund Study, a closely watched annual analysis of economic and structural terms among newly launched hedge funds. The latest edition reveals a widening disparity in launch terms between equity and non-equity strategies, reflecting the market’s evolving demand for portfolio diversification, downside protection, and alignment between managers and investors.

The data highlights a sharp divergence in management fees, liquidity profiles, and investor incentive use, reinforcing the notion that successful fundraising in today’s environment requires a nuanced understanding of allocator preferences and a disciplined approach to fund design.

Fee Pressure Intensifies for Equity Managers

According to the study, 77% of hedge fund launches in 2024 were equity-focused, a modest increase from 74% in 2023. Yet, this concentration belies the growing challenges equity managers face in attracting institutional capital. Amid heightened scrutiny on value-add, fee compression weighs heavily on new equity strategies.

From a fee perspective, average standard management fees for equity-focused launches declined to 1.38% in 2024, down from 1.48% the prior year. The reduction may seem small, but it shows managers have less power to set high fees. Investors want better deals and funds that beat the market. Similarly, the average incentive allocation rate across all strategies declined from 18% in 2023 to 17.11% in 2024, further indicating manager concessions.

To offset these pressures, equity managers are increasingly relying on founders classes to close early allocations. The prevalence of such classes increased to 70% in 2024, up from 49% in 2023, suggesting that upfront economic concessions remain a central component of new manager fundraising. In parallel, the use of incentive allocation hurdles has grown significantly. Based on the study, 44% of all funds now include a hurdle mechanism, up from just 15% in 2022. Notably, among those using hurdles, the split was evenly divided between soft and hard structures, highlighting the broader adoption of investor-friendly features and performance alignment tools.

These developments are particularly acute in the long/short equity space, where persistent allocator fatigue, benchmark-relative disappointment, and macro volatility have made capital raising more difficult. As mentioned in our May Capital return article, Long/Short Equity Strategies Face Challenges Amid Global Disruption, many allocators are reevaluating the role of traditional equity strategies in their portfolios, favoring uncorrelated exposures and asymmetric payoffs. The structural concessions observed in Seward’s study reflect a broader trend of recalibration within the equity segment.

Non–Equity Strategies Gain Structural and Economic Leverage

In contrast, managers launching non-equity strategies benefit from stronger investor demand and enhanced negotiating leverage. Average management fees for non-equity funds increased from 1.40% to 1.75% in 2024, a notable reversal of the prevailing fee compression trend across the broader industry.

This upward movement in fees coincides with a heightened focus on portfolio diversification, income generation, and capital preservation strategies, characteristics closely associated with credit, macro, and event-driven funds. Liquidity terms provide further evidence of allocator conviction, since 90% of non-equity funds imposed investor-level gates or lock-ups in 2024, up from 71% in the prior year. Moreover, 44% of all funds, across strategy types, employed both lock-ups and gates, up from 35% in 2023, signaling increased manager success in securing longer-duration capital.

By comparison, only 72% of equity funds imposed such restrictions, down from 78% in 2023, highlighting equity managers’ comparatively weaker negotiating position. Despite this, 95% of equity and non-equity funds offer quarterly or less frequent withdrawals, up sharply from 74% of equity funds in 2023. This indicates a broader industry shift toward longer-term capital alignment.

Founders class adoption also increased modestly among non-equity funds, rising from 47% to 50%. This further proves that these managers also employ incentive pricing strategies, albeit with less urgency than their equity counterparts.

Non-equity strategies have more power to charge higher fees, reflecting continued allocator demand for diversification and downside protection. This trend is evident in the more favorable fee terms and the structural design choices supporting longer-term, more stable capital.

Structural Evolution and Global Investor Considerations

Beyond fees and liquidity, structural trends point to a more globally oriented and institutionally aligned launch environment. The share of new funds structured as standalone U.S. vehicles declined to 55% in 2024 from 68% in 2023, reflecting a growing preference for master-feeder formats designed to accommodate global investors. Indeed, managers launching U.S. and offshore funds continued to utilize master-feeder structures almost exclusively, rather than side-by-side configurations.

In parallel, use of Section 3(c)(7) exemption, which limits fund access to qualified purchasers, declined to 66%, down from 75% in 2023 and 87% in 2022. This shift may indicate a modest shift toward more flexible investor eligibility under Section 3(c)(1), potentially in response to increased interest from smaller family offices and high-net-worth individuals. These structural adaptations reflect the growing complexity of global capital formation and the desire to establish investor-friendly, institutionally accepted fund platforms from inception.

The market was challenging in 2024. But seed investment in hedge funds stayed at the same level as 2023. Institutional seeders remained the primary source of seeding activity, highlighting continued willingness among sophisticated allocators to back first-time managers with credible teams, scalable infrastructure, and differentiated investment theses.

This finding reinforces the importance of strategic alignment and institutional readiness in securing early capital, particularly for managers seeking to scale beyond the friends-and-family phase.

Key Takeaways for Emerging Managers and Allocators

The 2024 data reinforces several important themes for managers preparing to launch and for allocators assessing new opportunities:

1. Fee Concessions Are Strategy–Dependent

Equity managers continue to face pressure to offer reduced fees and more investor-friendly economics. In contrast, non-equity managers demonstrate greater fee integrity, reflecting a stronger demand for diversified exposures.

2. Liquidity Is a Strategic Lever

Managers deploying non-equity strategies are more likely to secure lock-ups and redemption gates, often both, supporting investment flexibility and capital stability.

3. Founders Classes and Hurdles Are Now Baseline

The widespread use of founders classes and incentive allocation hurdles, particularly among equity funds, signals an institutional expectation for alignment and tiered participation.

4. Fund Structure Must Support Global Capital Access

The decline in U.S.-only structures and the dominance of master-feeder formats reflect the reality that managers must accommodate offshore capital and investor diversity from day one.

5. Seeding Opportunities Persist, But Expectations Are High

Institutional seeding remains available, but allocators are focused on robust infrastructure, differentiated strategies, and investor alignment. Managers must be operationally prepared and strategically positioned to compete.

The Bottom Line

Launching a hedge fund in the year ahead requires more than a compelling investment thesis. Managers must be prepared to address investor expectations on transparency, alignment, structural efficiency, and economic terms. For equity managers, success will increasingly depend on their ability to articulate differentiation, maintain cost discipline, and construct investor terms that reflect a balanced and credible business plan.

Meanwhile, non-equity strategies are enjoying renewed attention and more substantial leverage, but they, too, must remain focused on operational excellence and transparency as allocator diligence deepens.

In a capital-raising environment defined by caution and selectivity, managers who proactively align structure, strategy, and economics with investor objectives will be best positioned to build enduring platforms.

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