Hedge Funds' Side Letter Usage Remains Constant, as Redemptions Continue

51% of all investors using the individualized agreements are fund-of-funds investors, while $20.75 billion was redeemed from hedge funds in September.

Investor net flows into hedge funds were negative in September, a fourth consecutive month, according to eVestment’s Hedge Fund Asset Flow report.

Investors pulled an estimated $20.75 billion from hedge funds over the course of the month, while overall assets declined to an estimate of $3.423 trillion, slumping $75 billion on the back of redemptions and negative equity performance.

Only hedge funds with the primary strategy of managed futures, saw net inflows during September, with Q3 net outflows finishing well above average, eVestment reported. But despite the large amount of redemptions, the relative outperformance of hedge strategies in comparison to major public equity and credit benchmarks have been a highlight for many funds.

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Only 39% of hedge fund managers surveyed indicated that they had inflows for the month of September, the lowest read in this metric since March 2019.

According to a Hedge Fund Side Letter Study released by Seward & Kissel, the average regulatory assets under management of mature managers (managers in business for two or more years) was approximately $4 billion.

Side letters are stipulations to the management agreement which set out terms that supplement the governing partnership agreement and are typically memorialized in a letter executed by a fund manager and acknowledged by a negotiating limited partner, hence the term ‘side letter.’

The six principal types of side letter investors that were most common within the study were, funds-of-funds investors; endowments; non-profit institutions, government plans (which includes both U.S.-based and non-U.S. sovereign wealth plans), corporate pension plans and family offices/LP stakes operated by high-net-worth individuals.

Fund-of-funds side letter investors made up the greatest portion of the study, with 51% of all side letter investors being fund-of-funds investors.

Other findings included that corporate pension plans and non-profit institutions allocated only to mature managers, both government plans and endowments invested with newer managers (managers with less than two years of operation), and that government plans tended to write the largest checks, investing sums typically in the tens of millions to hundreds of millions range.

The study focused on five principal business terms in side-letter arrangements, including most favored nations protections, aka an MFN clause; fee discounts; preferred liquidity; capacity rights; and transparency and reporting obligations. MFN provisions stipulate a guarantee that the signing investor will not be disadvantaged compared to other investors in subsequent rounds.

MFN provisions appeared in 46% of side letters. Fee discount clauses appeared in 34% of all side letters, preferred liquidity was included in 18% of the side letters, and capacity rights appeared in 15% of the side letters. The least common side letter term was portfolio transparency/reporting obligations, which appeared in just 8% of all side letters.

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Tags: eVestment, Hedge Funds, most favored nation, Nasdaq, Seward & Kissel, side letter, side letter investors

Aflac Global CIO Eric Kirsch is retiring at the end of March and will be succeeded by Deputy Global CIO Bradley Dyslin, who will assume the role at the beginning of 2023. Kirsch will remain with the company for the first three months of the new year to help with the transition before retiring.

Kirsch joined Aflac in November 2011 as senior vice president and global CIO, and was promoted to executive vice president the following year. In 2018, his job expanded and he was named president of Aflac Global Investments, Aflac Incorporated’s asset management subsidiary. He oversees the company’s investment strategies, including Aflac’s investment portfolio and its investment teams in the U.S. and Japan.

Before joining Aflac, Kirsch was managing director and global head of insurance asset management at Goldman Sachs Asset Management, where he managed a team of 55 professionals and oversaw more than $70 billion of insurance assets in the U.S., Europe, and Asia. Prior to Goldman Sachs, Kirsch spent 27 years combined at Deutsche Asset Management and Bankers Trust, most recently serving as managing director and global head of insurance asset management. The company credits Kirsch with “consistently outperforming investment performance targets” during his tenure, while incorporating environmental, social, and governance investing principles.

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“Eric has successfully built a leading global investment team while managing a well-diversified portfolio that has mitigated risk and added substantial income,” Aflac Chairman and Chief Executive Officer Daniel Amos said in a statement. “At the same time, Eric has developed a superior leadership team, including Brad, who has done an equally remarkable job enhancing our investment function.”

Dyslin joined Aflac in 2012 as managing director and global head of credit for Aflac Global Investments. He implemented a new credit function that the company says led to a significant improvement in portfolio quality, while becoming a core investment strength. He was promoted to senior managing director in 2016, and the following year, his role was expanded to co-lead the external management platform responsible for asset outsourcing and overseeing third-party managers. He was most recently promoted to deputy global CIO in 2021.

Aflac says Dyslin currently provides senior leadership for investment initiatives, such as strategic asset allocation and setting investment strategy. He is also responsible for the portfolio management, research, and investment recommendations for all credit-related assets that make up the core of Aflac’s global portfolio. Dyslin also researches potential new strategic investment opportunities, oversees Aflac Global Investments’ strategic investment and corporate development activities, and serves on the board of Varagon Capital Partners, Sound Point Commercial Real Estate Finance, and Denham Capital Sustainable Infrastructure.

Prior to joining Aflac, Dyslin was senior vice president, head of research and portfolio manager for Hartford Investment Management, and before that was director of U.S. credit research for Deutsche Asset Management in New York. He is a Chartered Financial Analyst charterholder, and earned a bachelor of science degree in business administration and economics from Morningside College, and a master of business administration degree from the University of Iowa.

“Eric has distinguished himself as an outstanding partner and accomplished leader who has grounded our portfolio with a robust strategic asset allocation process,” Aflac President and Chief Operating Officer Frederick Crawford said in a statement. “As part of his decade-long legacy, Eric leaves us with an excellent successor in Brad. Their collaboration over the years will ensure continuity and will result in a seamless transition, as Brad is the right person to lead Aflac Global Investment’s teams and investment strategy into the future.”

Hedge Funds’ Side Letter Usage Remains Constant, as Redemptions Continue

Eric Kirsch to Retire as Aflac Global CIO in March