From our vantage point as advisers to many of the world's top hedge fund managers, broad market forces flow through to our instructions, and ultimately drive many of the terms of the funds we advise.

In this series we take a look at what we have been seeing in the investment funds world. Part three will focus on hedge funds.

Liquidity follows strategy, but managers can use it to their advantage

The most influential factor affecting a fund's liquidity terms is its strategy. Monthly and quarterly redemptions remain the most common liquidity structure in 2017 for traditional corporate fund structures.

One third of the funds surveyed employed lock-up periods, typically for 12 months and with a broadly even split between hard lock-ups (redemptions not permitted during the lock-up period) and soft lock-ups (redemptions permitted, but subject to an early redemption fee). We have also observed managers using lock-ups, either in 'founders' classes or in side letters, to commit anchor investors or to secure investors with whom they have agreed material concessions in side letters. This gives the manager a pool of committed capital for the initial years of a fund's life. Where an anchor investor expects a minimum commitment period, formalising the commitment with the fund, especially if it assists the fund in attracting other capital, is an easy give. We expect this trend to continue.

Corporate Governance

Many of the governance-related indicators that we follow have remained broadly consistent with prior years, and independence remains a common theme.

Institutional investors continue to focus on independent oversight in the form of non-executive directors and advisory board members and industry experts and others with strong business or academic records, relevant to the fund's investment focus, continue to fulfil governance roles.

What to look for in 2018

The most important trend to watch in 2018 is whether the recent run of returns can be sustained, much of which will depend on managers' ability to navigate the political and economic landscape. Nearly all of the trends we have identified in our surveys are ultimately a response to a prolonged period of investor frustration with returns. If strong performance leads to a significant positive shift in investor sentiment towards hedge funds generally, then we may look back at 2017 as the year things turned for the hedge fund industry.

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