Monday, 20 February 2017
Last updated 2 days ago
May 14 2010 | 9:20am ET
By Patrick O’Meara, Founder, Profor Securities -- Raising money for hedge funds has never been tougher. It was not that long ago that money was pouring into anyone who established a hedge fund. But with all of the frauds and the market meltdown of 2008, those days are gone. The hedge fund business has slowly become institutionalized; investors not only have large sums of money on the line, but also their careers. Hedge fund managers spend a lot of their resources on the investment side of their business, many on fancy offices – but they often neglect investing in the client-facing side of the business.
People buy people not track records. Today’s hedge fund manager should realize that obtaining clients and keeping them satisfied is just as important as the funds’ performance. Experience, performance, infrastructure, and risk management are a ticket to the dance, but you won’t be dancing without a proper marketing and client-servicing effort. It is critical that managers treat their clients and potential clients as if they actually matter – because they do. By definition, the manager is the General Partner and the investor is a Limited Partner. According to Webster’s dictionary, a partner is defined as “One that is united or associated with another or others in an activity or a sphere of common interest,” on the same team so to speak, but in many cases the hedge fund manager treats the investor as an adversary. On the investor side, due to all the frauds touted in the media, it is no wonder investors are often left questioning the managers’ intentions and credibility. Successful firms view clients as real partners and in most cases these clients will stay with them through tough times.
While there is no silver bullet to guarantee a hedge fund manager more assets, the following 10 steps will increase your chances of raising capital.
10 Steps To Gaining More Clients:
1. COMPANY MESSAGE: Formulate a Company Message that is clear, concise and memorable. The goal of your Company Message is to clearly inform the investment community who you are and what you do. Your message should come from top management and be well known by all employees. All marketers should be able to articulate your Company Message and be able to have a fairly detailed discussion about your firm and the portfolios. Your Company Message may change as you grow your business.
2. PITCH BOOK: Take a close look at your pitch book. This is your image piece, it is a necessary evil, you must have one. The ultimate goal of the pitch book is to get a face to face meeting with a potential investor. Does your pitch book clearly explain, Who you are (your firm history and pedigree), What you are doing (your strategy and the market opportunity) and How you are doing it (your investment process and management of risk). Each page in your pitch book should be there for a reason. If you cannot articulate why a particular page is in the book, take it out. Keep your pitch book simple, accurate and to the point.
3. THE MEETING: Having a face to face meeting with an investor is a big deal. Treat it as such and be prepared. It is the main event, opening night on Broadway. What do you want the investor to think and feel as he/she hits the elevator button to leave your office just after meeting with you? Do words like trustworthy, honest, experienced, smart and confident come to mind? Most investors when asked why they invested with a particular manager will say something to the effect of, the manager has a good track record, good infrastructure, manages risk well, etc. All of that is true, but there are others who may have a better track record, have more people, and manage risk better, yet the investor did not invest with them. So what is it? In the end, not to get too deep, it is the experience that the investor had in dealing with the manager during his/her due diligence process. It comes down to a gut feel that the investor has based on these experiences that drives him/her to invest. The manager has a lot of control over what the potential investor will experience during his/her due diligence process. Make your pitch a conversation rather than a presentation. Make sure you answer questions accurately and clearly. In most cases the investor does not have the same experience as the manager, so use terminology the investor understands. Using terms such as conditional asset swaps, rolling spread locks, condor trades, etc., without clearly explaining what they mean, may impress the investor, but will also confuse him/her. An impressed confused investor will not become a client. Obviously, if the investor understands all the applicable terminology, then have at it. The goal of a meeting is to get to the next meeting and ultimately call the investor one of your clients.
4. THE PITCH: There is an easy to follow and easy to understand way to pitch a hedge fund: remember the goal of the pitch is to clearly articulate who you are, what you are doing and how you are doing it. It is not to razzle dazzle the investor or show them how smart you are. The following template should be used to make your pitch: a few examples have been mentioned, but each section needs to be fairly detailed.
a. History of the firm and key people, years in business, ownership structure, firm & fund assets under management, number of employees, funds managed and strategies, etc. The longer the firm is in business, the more you speak about the firm and less about the people. If there are negative rumors or truths about your firm, pro-actively address them: chances are the investor has heard them or will hear them during the due diligence process.
b. Capital Allocation: some firms allocate capital to individual portfolio managers to trade. The goal here is to clearly explain the process as to how allocations are decided, who makes the decision, how often it changes, etc.
c. Security Selection: where do trade ideas come from (internal/external), what has to happen for a security to get into the book, how are trades sized, are hedges implemented at the security level or portfolio level, are shorts put on as a hedge or to make money, etc.
d. Portfolio Construction: how is the portfolio constructed, how do you think of the portfolio from a thirty-thousand-foot level, etc. In the end you are running a portfolio.
e. Risk Management: after the recent market turmoil, which continues today, managing risk has risen to the forefront as the biggest concern for investors. What risks are you taking and ultimately willing to take, what risk limits are being utilized, who is managing the risk, are you using value at risk, how many stress tests are being run, what are they and and how often are they run, etc.
f. Operations: discuss middle and back office functions, how securities are priced, leverage providers, prime brokers, custody of assets, managed account capabilities, etc.
g. Client Reporting: here is what you can expect from us in terms of reporting and transparency should you invest.
5. CONSISTENCY: Your message must be consistently conveyed to investors. Years ago many investors would invest after speaking to a marketer, without an office visit, after a quick review of a one-pager – that game is over. Now most investors will meet at least five people at the hedge fund: the marketer, CEO, portfolio manager, risk manager and COO. These people must say the same thing – it is very common to hear discrepancies from one person to another, even on simple things such as assets under management, number of people at the firm, number of stress tests, etc. People are entrusting you to manage their money - in many cases an inconsistent message is a dealbreaker for the investor.
6. THE INVESTOR: Let the investor know you really want his/her business, you want him/her to become a client and partner. There is no faking this, you either care or you don’t. If you mean it – it will shine through. This is a separate step because it is so important. There are many hedge fund managers that either really don’t care about investors or if they care they don’t show it.
7. EXPECTATIONS: One of the most important things in any relationship is managing expectations. Investors will tell you that hedge funds for the most part have done a poor job of this, with some exceptions, of course. You are building a relationship, a partnership if you will, with investors; it takes a long time to build and not so long to destroy. If you manage expectations properly, you will have very few problems with investors. Here are two examples out of many situations where a manager should have an internal policy on what to do.
a. If you experience a larger than expected draw down, don’t hide from it – get out in front of it, make the call, answer the phone, explain it. Investors are big boys and girls they can handle bad news, but they MUST hear the bad news directly from the manager.
b. Managers don’t like to tell investors when someone leaves their firm (it’s obvious why). Inevitably it is known in the marketplace that so-and-so left the firm. Institute a policy that upon a departure from your firm, the investor will be told in writing. Also, there is no need to say the new replacement is better, just highlight their qualifications and offer for investor the opportunity to meet the new person.
8. COMPETITON: Regarding your competition, if you don’t have something positive to say, say nothing. Don’t spend too much time coming up with your “edge,” which implies you have special skills that others don’t have – 99% of the time, you don’t. Just highlight what you are good at. You don’t need to compare yourself to your competitors; the investor will make those comparisons.
9. CLIENT SERVICE: Make your client service area first rate. This is very easy to do: just ask your investors who they feel is the best in the business at client service, ask what are they doing and do the same or more. You don’t have to recreate the wheel. Make the phone call and ask the question – pretty simple. It is important to understand what your clients expect. Be responsive with accurate information. Get accurate NAV estimates and final NAV’s out in a timely fashion. If your clients don’t keep in touch with you, keep in touch with them, get to know your client, build a relationship.
10. YOUR FIRM: Operate your firm like a business. As you grow, hire qualified people and truly delegate authority. The ultimate goal of your company should be to create an atmosphere and culture where everyone who works there really enjoys his/her job. It starts from within and in the asset management business, it starts from the marketing and sales department. You could be the greatest money manager in the world and if you have no money to manage – you are nobody. When AUM is increasing at a hedge fund the energy created throughout the firm is contagious. Pay your people well, have fun, do the right thing and one day you may become a brand name in the business.
You will notice above we did not touch on a key ingredient needed to be successful in raising capital – performance. Performance is a tricky thing to measure, ie., over what time period, what alpha was generated, what risks were really taken, vs. perceived competitors, etc. What marketers really need to be successful is competitive performance, it does not have to be the best, but it has to be in the game. Underperformance is fine, as long as it is explained properly and the manager can articulate lessons learned and resulting changes implemented.
Raising money is a process that takes time; it requires a lot of blocking and tackling (calls, meetings, meals, trips, etc.). There are a small number of firms who are lucky enough to have become brand names in the hedge fund business, some by design and some by being in the right place at the right time. Unfortunately for everyone else, institutions typically buy brand names. To become a brand name in today’s environment you will need to become a client-centric firm. The steps above will bring you closer to that goal.
Patrick O’Meara founded Profor Securities, a FINRA Registered Broker Dealer in 2006. Profor offers two services, third party placement of alternative investment products, and sales and marketing consulting for hedge fund and private equity managers. Prior to founding Profor, O'Meara ran the Marketing and Client Service Department at Clinton Group for nine years where he managed a staff of 10 people. At Clinton Group, hedge fund assets peaked at $6 billion.