Hedging Against Reputational Risk in the 21st Century

Feb 12 2016 | 8:18pm ET

 Editor’s note: For investors, the first step in researching a new fund or manager is to google them, and what they find online will either encourage or derail further discussions. Surprisingly, most managers don’t think about digital reputation until something goes wrong - a disgruntled former employee starts posting disparaging or untrue information online, bad press from events years ago overshadows recent performance, etc. A better approach, explains Christina Bertinelli of Lumentus, is to actively curate your digital reputation so that the information available online – and what comes up on the first page of those search engine results – tells the right story.

Hedging Against Reputational Risk in the 21st Century

By Christina Bertinelli

A perfect storm of uncertainty is hitting the financial world. The presidential election, dropping oil prices and an uncertain economy are leading to major market fluctuations, at the same time as managers are being hit with a record number of hedge fund liquidations. All of this means investors are looking at much more than a fund’s proof of performance – they are relying on its digital reputation, and their first impression is based on what they find online.

Recently released data from Hedge Fund Research shows that while a record 700+ hedge funds shut down in 2015, total hedge fund assets rose $51.7 billion to a record $2.97 trillion at mid-year.  The numbers fluctuated after large outflows during a volatile Q3 but in the end, despite the closing of many hedge funds, institutional and private investors are still allocating.

What does this mean for hedge fund managers? The answer depends largely on the size of the fund, since larger managers (AUM of $5 billion or more) received the greatest inflows.  Smaller firms still have tremendous opportunity to raise new capital, but have to prove their value to potential investors.

“While financial market dislocations have contributed to mixed performances across the most directional energy- and credit-sensitive strategies, many larger hedge fund firms had positioned conservatively for the reversal of the equity beta trend,” said Kenneth J. Heinz, president of HFR.  “With clear acceleration of these transitional trends into early 2016, it is likely that investors will continue to exhibit strong preference for low beta exposures and leading firms into 2016.”

An analysis of Google keywords shows investors are doing increased due diligence on hedge funds and their principals. Whereas due diligence has always been a complex and opaque affair, it now starts – and often ends — with Google.

(click to englarge)(click to englarge)Profiles and information found online define an executive or fund’s digital reputation, and that will often dictate whether investors even choose to have a first meeting. 

Between 2014 and 2015, searches for key terms such as ‘hedge fund manager’, ‘hedge fund’, ‘venture capital’, ‘CEO’ and ‘managing director’ increased between 25 and 50 percent. Not only are the firms themselves being searched, but the executives who run them are being actively scrutinized as well. Managing the first page of search results is thus more crucial than ever.  

Accordingly, hedge fund managers and their firms are at not only at risk, but also have an opportunity to grow and manage their digital reputations. The risk lies in that defamatory content, negative reviews or critical news coverage are what people may first read when Googling a firm. Armed with first impressions made on Google, a potential investor may be skeptical to invest with someone making headlines for a divorce, SEC issue or old lawsuit looming. Actively managing those search results can help protect a firm’s reputation and ultimately drive business to them.

Meanwhile, the opportunity to manage and improve one’s online presence is greater than ever, as investors want to understand with who and into what they are putting their money. There are several approaches funds can take to boost and raise their online presence. Here’s a look at some of them:

  • Expand and open websites. Hedge funds can leverage their websites to define who they are, what they stand for, how they differentiate themselves and ultimately, who and what people will investors trust. This information helps investors make an informed decision, as the values of a firm and what they stand for may impact an investor’s decision. Opening up a website and producing valuable content about who comprises a firm and what it stands for is also well received by Google and helps to protect online reputations. A strong, more open website will rank high on Google, pushing old, negative content lower in the search results, and with the right amount of art and science, off to the second page of search results.
  • Own social channels. When good or bad news strikes, social channels are a great way to share relevant information. It’s important that firms proactively define their stories, and not rely on others to tell it. There are tools to make the social process easy and even if not active, just owning the channels with a firm’s name can be crucial. A strong LinkedIn presence also establishes a firm and its executives as thought leaders and provides added credibility when being searched.
  • Monitor for issues. Being aware of problems before they really hit the mainstream are key to any firm, especially in turbulent times. Companies can hire agencies to monitor and address issues immediately, while there are also options like setting up Google alerts to identify news about a firm and its executives. Alerts should be setup for the firm, key principals and any other relevant terms. If a firm primarily invests in certain companies or industries, then an alert for those would be helpful as well, in order to know what issues are making headlines. Getting out in front of a situation will help firms defend itself when and if necessary.
  • Produce content. Statistics show that culture, missions and values of a firm matter. Publishing blogs, articles and other relevant information created by a firm and its principles to websites and social media channels helps define the story that will be encountered by those searching about a firm online. Blogs or publishing on LinkedIn can boost Google rankings, so instead of people finding no, little or incomplete information about firm online, or worse, negative information told by others, managers can create the relevant content they want and need their key audiences to know.

Both personal and institutional investors acknowledge due diligence and reputation plays a major role in their decision-making.

At the Wildlife Conservation Society, Sean Cover serves as the Director of Treasury and Investment Operations, where he manages the global conservation non-profit’s endowment. An integral part of his due diligence process is to use search engines to uncover any instances where the fund or its executives are linked to scandals or negative news.

“We use search engines to ensure that firms and managers in which we are interested in are not making negative headlines for billion-dollar divorces, scandalous issues or spending tons of money on mansions, art, yachts or hunting trips,” said Cover. “Even after initial investments, I often set up daily Google news alerts to inform me if any of our fund managers are making headlines. I have had a daily news alert on one hedge fund with a flamboyant CIO for over four years now. If there is bad news, I need to know it before my CFO and Investment Committee. That goes for prospective fund managers as well as ones already in our portfolio. It’s crucial for firms to be aware of the image they are portraying online if they want to attract and maintain allocations from institutional investors.”

A fund’s performance is more closely linked to its reputation than many investors realize. A Focus Consulting Group study found firms with “clear missions that developed a solid set of core values and built solid working relationships on trust and respect outperformed the control group of firms that didn’t.” A full 95 percent of investment professionals said they ‘agree’ or ‘strongly agree’ that culture matters. Performance alone is no longer a ticket to an investment or allocation.

Perception is reality, and the good news is executives and firms can directly influence the impression generated in search results, as well as the culture reflected by the firm’s website and other online content. Basic common-sense approaches to building and maintaining a strong online profile can mean the difference between a bump in the road from an executive departure or litigation, and a full-blown crisis.

Managing an online reputation doesn’t mean any consulting firm can remove negative headlines from the news or from search results. No firm or executive is perfect, and issues may arise, but a story from five years ago shouldn’t be the first headline a potential investor reads. Dynamically managing digital reputations means those potentially damaging stories no longer define a firm or its executives. Part art and part science, when successfully implemented, digital reputation management can at least balance the playing field and at best ensure that stellar performance owns the spotlight.

While politics, energy prices and the economy remain in flux, a strong, well-managed online presence can shift the conversation during key meetings. It’s a chance to focus on the future and the value a hedge fund and its manager offers to investors.

 

Christina Bertinelli is a senior partner at Lumentus, where she runs the digital reputation management practice and oversees a team of content specialists, technologists and search experts. She has shaped and supervised marketing and communication projects for more than 16 years with a focus on creative excellence, brand strategy, client satisfaction and fiscal responsibility. 


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