Of all hedge fund investors, funds-of-funds and public pensions have had the most success in securing preferential terms, according to a new study.
Analysis of hedge fund side letters—negotiated agreements that override terms applicable to other investors—showed that hedge funds most often entered into these preferential contracts with funds-of-funds, which made up 30.5% of all side-letter investors.
In close second were government plans, which made up 27.1%, according to law firm Seward & Kissel.
Endowments, meanwhile, made up 15.2% of side letter investors, while family offices and high net worth individuals represented 13.5%.
The fewest side letters went to corporate pensions (8.5%) and non-profit institutions (5%).
These side letters most often featured ‘most favored nation’ clauses, which appeared in 56% of all side letters included in the study. In addition, 40% of preferential terms agreements offered investors fee discounts.
Wealthy individuals and family offices secured fee discounts in a majority of side letters, with 63% of these agreements offering cheaper terms. Corporate pensions, on the other hand, only negotiated lower fees in 20% of their side letters—and non-profits were not given any discounts at all.
Of investors who did secure cheaper terms, one third had to agree to a longer-lockup in exchange. Only half received discounts on both management fees and performance fees.
Other preferential terms focused on reporting obligations, preferred liquidity, and capacity rights, or the ability to increase investment capital at preferential terms.
Of these, reporting obligations were most prevalent, featured in 21.6% of side letters. These terms focused on improving transparency, either requiring reports on portfolio winners and losers or portfolio exposures, or mandating complete portfolio transparency—at request or on regular basis.