5 Capital Raising Strategies For Hedge Funds And CTAs

Jan 11 2010 | 1:17pm ET

By Kevin Rogers -- The recent uncertainty in the markets has changed the game for commodity trading advisors and hedge fund managers.  While performance is still a major factor in attracting capital, in the post-Madoff era, savvy investors grow increasingly concerned with clarity, transparency, and operational integrity when they screen various managers.  Performance catches the eye on the database, but it doesn’t close the deal.

Attracting capital is about offering clients exactly what they’re looking for in a capital management firm.  A recent survey by SEI found that while 90% of institutional investors plan to maintain or increase their allocations to hedge funds, they would be exercising greater due diligence. In other words, just having great returns will not cut it. CTAs and hedge fund managers must present an image that builds trust and embodies operational integrity if they are looking to attract interest from both high-net-worth and institutional investors.

Here are five strategies I’ve put together to help you raise capital for the coming year:

Build a Team That Inspires Confidence

Your public image should exude professionalism in every aspect of your firm.  It’s tough to promote your company as a top tier financial institution if there are weaknesses in your operation. Some weaknesses include having a trader wear multiple hats in the organization, or even not having the proper operational guidelines in place to pass an onsite due-diligence exam. While costs might be an issue for some managers, there are ways to outsource some of these critical roles. Smaller funds should seek out third party expertise to handle those functions where they may lack the needed competencies.  Ensuring your fund has no weaknesses gives you a stronger product to offer your market.

Maximize Your Exposure

Most hedge funds lack a solid public relations component.  While the clients to whom you can market directly belong to a select group, getting your name out there helps you attract them.  Getting listed on the fund databases is a good start, but it’s only a start. You need two separate marketing strategies.  The first is to get the client’s attention.

While regulations prevent you from directly marketing your trading program to the general public, a savvy fund manager can get media exposure and the interest that comes with it by offering thoughtful commentary on market or economic trends.  Press releases and media appearances can go a long way toward building a positive buzz for you. 

Some fund managers run blogs—that may or may not be about finance—while others write and promote books.  While you should always consult a regulatory professional before speaking directly to the public to ensure your message plays by the rules, the attention is always worth the effort.

Have Your Message Ready To Go

Prepare a presentation ahead of time.  The second part of an effective marketing strategy is to diligently develop marketing materials before making a presentation to potential investors.  When you have the opportunity to pitch to a potential client it is imperative to be well organized; there is only one chance to make a first impression.  In most instances, especially with high-net-worth customers, the fund's prospectus or disclosure document alone won’t cut it.  Presenting marketing materials that explain the fund’s investment strategy and philosophy in ways that are easily understood can make all the difference.

Investors are reluctant to invest their money in strategies they don’t understand.  There’s nothing wrong with complex or unorthodox investment strategies as long as they are clearly explained and easily understood.  Your sales materials should carefully describe your investment process in an audience-friendly manner.  If you can’t readily articulate how you do what you do, you will find it all the more challenging to win the confidence of a potential client. 

Your investor relations kit must make it simple to verify your claims because your clients will be studious.  Sales materials should never make claims that are not included in the fund prospectus, and forward-looking statements must be used with great care.  Your materials must be as much about transparency as they are about sales. 

An attractive PowerPoint presentation that gets the right message across should be the centerpiece of the sales package, but you also need sales brochures, due-diligence questionnaires, a corporate introduction and sales aids.

Be Completely Transparent and Honest to Build Trust

In this market, your clients will be clenching their dollars tightly to their chests until they know they can trust you.  While this point seems a bit too obvious, it is essential that you emphasize integrity from the get-go. Don’t embellish your performance, and don’t hide things in fine print. Don’t exaggerate your previous trading experience or tell investors about how much money you are expecting to receive in the next few months.  Being honest and transparent builds trust with your clients.  If the fund performed well, explain exactly why.  Even more important is to clearly explain the reasons if the fund underperforms.  Investors expect forthrightness from their money managers, but they also appreciate it when they get it.  You want long-term relationships with your clients based on trust, so do everything you can to foster that trust and you will win more business.

Another way to build trust with your clients is to emphasize the purpose each member of your investment team plays.  This way the client can put a face with a function that is looking out for their money.

Emphasize What Makes You Different

Of course, your presentation must cover the 4 P’s: People, Process, Pedigree and Performance, but your clients have probably heard the same pitch from dozens of fund managers.  How are you different?  Try to explain your fund’s operation in ways that capture the interest of the audience. What about the trading strategy? Are you able to effectively communicate why it is different from similar programs? Many investors often scan marketing material and look only for programs that are different and unique. That is why it is important to articulate- in both written and verbal terms- what makes your program stand out from the crowd.

If you are a new or emerging manager, don’t get discouraged.  While your track record might not be as long or your pedigree might not be spectacular, there are countless examples of non-professional traders who are now managing large funds. In addition, this could be a way that you emphasize how your trading program is different from the rest.  Over the past decade, there have been several funds and investors that have formed with the focused purpose of allocating only to new or emerging managers.  Positioning yourself to market to these investor groups might prove advantageous.

Using these five strategies will go a long way to building up your capital, and keeping your firm competitive for the long run. 

Kevin Rogers is a marketing consultant with Turnkey Trading Partners working to create unique and powerful branding and marketing solutions for Commodity Trading Advisors, Hedge Funds, FX and Capital Management firms.  Before teaming up with TTP, Rogers worked as an independent developer of marketing and public relations materials for a wide array of financial companies.  He is a graduate of U.C. Berkeley and holds an M.A. in business communication.  If you like Rodgers’ thoughts, have ideas, or want to ask questions, he’d love to hear from you. Send your requests to info@turnkeytradingpartners.com

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