By Don Steinbrugge -- The hedge fund industry is the most competitive in the world, where portfolio managers are constantly struggling to identify inefficiencies in the capital markets and quickly take advantage of them before their competitors. The most extreme example of this are high-frequency traders, whose offices are usually strategically located near exchanges, because every millisecond matters. It is an industry based on survival of the fittest, where managers who don’t succeed at generating strong returns or evolving their firm with changing market dynamics cease to exist. This has especially been the case within the fund of hedge funds market over the past five years.
Despite this culture, there is almost a complete lack of focus on a marketing strategy to take advantage of last year's JOBS ACT. This atrophy is due to strict historical regulations that significantly limiting a hedge fund's ability to sell itself, creating an industry where a majority of assets have been going to firms with the strongest brands—and not necessarily the highest-quality funds. The end of the eight-decade-old marketing ban—the Securities and Exchange Commission is set to vote on the proposal tomorrow—will change this and give hedge funds an opportunity to dramatically change the relative position of their brands within the industry.
Agecroft Partners believes the new rules should prompt all hedge funds to re-evaluate their marketing strategy. Some of the questions that need to be addressed after taking into consideration compliance issues include:
What additional information should be included on Websites?
Many hedge funds will begin to include information on their organization, investment team, investment philosophy and process, risk controls, performance, terms and service providers. Some might include copies of monthly letters and their due-diligence questionnaire. Proprietary information will either be password-protected or require a nondisclosure document, but the strong trend is towards greater transparency. Firms should also determine if there should be different protected areas of the website based on which an investor's country of residence. Other things to consider are Website optimization strategies for Google-enhanced placement and determining other Websites with whom to strategically link.
Should the firm develop an advertising strategy?
If so, they need to determine the target market they want to reach. There are many publications that focus on the traditional hedge fund industry and alternative investments. Others focus on specific target markets such as pension funds, endowments, foundations and registered investment advisors. Lastly, there are the more broadly circulated publications and television programs that target high net-worth individuals.
In analyzing the various advertising channels it is important to consider the circulation and how much of it overlaps with the target market the hedge fund is focusing on, as well as costs. It is imperative that an advertizing budget allow for a campaign that is repetitive. Placing one ad doesn’t do any good. Before beginning a campaign, it is important to determine what your message is—and it should be highly correlated with how the firm wants to be perceived by the marketplace.
Many hedge funds will dip their toe in the water by targeting those publications that are focused on the hedge fund industry; over time, however, this strategy will broaden to include mainstream media.
Should the firm develop a publicity strategy?
Positive publicity can significantly enhance a firm’s brand in the marketplace. Crafting a successful strategy requires significant planning to identify which media outlets are focused on target markets. This is followed by identifying appropriate contacts at each organization. For print media, it is the reporters who cover the hedge fund industry; for business television, it tends to be the producers. All of these individuals are inundated with story ideas and offers to serve as sources, inquiries which will exponentially increase following the approval of the SEC. This is a relationship business that is difficult to break into.
One way to develop strong relationships with media members is to attend conferences they also attend. Two conference this fall in New York expected to have large media coverage are FINforums in September and Hedgeopolis in November. A good PR firm can add significant value by indentifying who to contact and providing access. They will also advise clients on what to say, how to say it, and most importantly what not to say. You typically only get one shot at a producer or reporter, and if you do a good job you will be contacted again.
Should the firm contact a broader universe of investors?
There are a number of ways to reach a broader audience. The first is through direct e-mail: There are many databases of hedge fund investors available for purchase; most of these have a lot of bad data, but are a good place to start all the same. Another way to reach new investors is through hedge fund industry databases, some of which may soon be published in mainstream media. In addition, attending multiple industry conferences is a strategy many firms utilize. Hedge funds can also reach new investors by leveraging intermediaries such as third-party marketing firms or prime brokerage cap intro teams.
What other things need to be considered when targeting high net-worth individuals?
If a firm makes the decision to target high net-worth individuals, it should consider lowering its investment minimum to $100,000 and increasing fees for accounts below $1 million. It should also create new marketing material structured in paragraph form, versus the standard industry bullet-point pitchbook format. In addition, it should consider creating a tiered sales and client service model, where investors of different sizes are treated differently. For example, small clients would not be given individual access to the portfolio manager. It is important to have the appropriate infrastructure in place to handle the additional inquiries, before broadening out the marketing strategy.
Most hedge funds will initially take a "wait and see" approach, observing the strategies utilized by peers. However, Agecroft believes that the first to take advantage of the new regulations will enjoy a material edge in building their brand, not only through advertisements, but also the publicity generated by these ads. Long term, we expect see hedge funds advertise on television and potentially sponsor major sporting events.
Don Steinbrugge is Chairman of Agecroft Partners, a global consulting and third party marketing firm for hedge funds. Highlighting Don's 27 years of experience in the investment management industry is having been the head of sales for both one of the world's largest hedge fund organizations and institutional investment management firms. Don was a founding principal of Andor Capital Management, which at its peak was ranked as the 2nd largest hedge fund firm. Previous to Andor Capital, Don was a Head of Institutional Sales for Merrill Lynch Investment Managers and Head of Institutional Sales for NationsBank (now Bank of America Capital Management). Don is a member of the investment committee for multiple institutional investors and is a frequent speaker at industry conferences relative to trends in pension funds, endowments and foundation asset allocation and the hedge fund industry.