Guest blog writer Andre Boreas of Quadsight Partners discusses the new engagement model for smaller fund managers to successfully raise assets.
HFR’s third quarter hedge fund flows report was quite interesting to say the least. Performance aside, small and mid-sized hedge funds experienced a positive net inflow while larger funds saw a net outflow in Q3, 2015. Funds managing between $1 billion and $5 billion gained $3.6 billion in new assets while firms with less than $1 billion in AUM saw inflows of $2.4 billion. Funds over $5 billion saw a net outflow of $300 million.
So, has the playing field really begun to level out for the smaller guys? I believe it’s much too early to tell. The largest hedge funds (over $5 billion) still manage almost 70% of industry assets but represent only 6% of the number of firms. It could be argued that given mediocre returns this year across many strategies along with some high profile managers struggling with significant drawdowns (ie: Greenlight, Pershing Square) investors are turning to smaller managers that might run strategies that are typically capital constrained but that have better alpha potential. For whatever the reason, the competition is still fierce in attracting investor capital. Here are a few ideas on how to stand out, get organized and get noticed, regardless of your investment strategy (and really, these ideas cut across all types of investment managers…long-only, private equity, real estate, etc.).
Produce better content/investor-facing materials. Performance will get you in the door but the old tag line of “equity like returns with bond like risk” simply does not suffice anymore. Yes, you have your facts sheets, quarterly reviews and PowerPoint presentations, all highlighting the three “Ps” (process, performance and people), but so do the other thousands of funds raising money. Investors these days are looking for a unique strategy that compliments their existing portfolio. In the marketing world, we call this offering a “solution” rather than a “product”. Having a strong understanding of your prospect, their risk tolerances, investment acumen and portfolio composition (as much as the investor is willing to share such things) can make the difference whether your material actually gets read or gets the 15 second fly-by before being filed away without a second thought. To differentiate yourself, fund managers need to present themselves way beyond the three “Ps”. What new and unique perspective can you add to the discussion? Can your strategy add value to their total portfolio? Can you make them a better investor by sharing your insights in to the market? And, most importantly, can they feel like they can trust you?
Integrating the investor’s persona into the marketing and sales process is only half the battle, though. Industry veterans know the sales cycle can go on for many months if not years. Good business development professionals understand that staying organized during this courtship is key to an ultimate allocation. The question then becomes, what is the appropriate process and subsequent infrastructure that you will need to engage with your prospects that allows you to manage, review, share and distribute your new message to the appropriate people? This is where technology steps in – providing a systematic way to track conversations, notes, emails, relationships, and most importantly, insights. The insights are the “what”, the system is the “how”. A sound CRM provides a central repository with which everyone in the firm can access relevant investor information so that subsequent conversations can continue along the personalized engagement strategy you’ve already established. The goals here are both efficiency and consistency. Efficiency so that the total view of your investor is a keystroke away and consistency so that everyone in the organization stays on message to push the conversation forward. Similar to so many other industries, technology can be a great equalizer.
Let’s take a look at an example to see how this might work. You’re a distressed credit manager and you’ve been emailing ABC foundation for six months, trying to get a conversation going. You learn that the foundation has allocated to a number of equity long/short managers but have not invested in distressed because they have heard “the time’s not ready”. The conversation ideally should entail a discussion about the opportunity set unfolding in credit – from energy assets to European bank debt to the upcoming uptick in default rates. Education – from third party resources to in-house opinion, is well received. You get a meeting with the client. Both you and your portfolio manager are coming in from different locations with little opportunity to review the client before you meet. Both of you can access your technology/CRM remotely and therefore have access to the insights and conversation history to have a productive meeting. The conversation can now turn to how your fund can potentially fit into their greater portfolio. You have given them insights into the credit markets they might not know about and they have given you insights into where they stand with their portfolio. The buyer / seller personas have now evolved into more of a trusted relationship – always the key milestone in raising assets.
The rules for successful investor engagement have changed over the last few years. Capital continues to flow into alternatives, but, for the most part, it’s the large brand name managers who reap the lion’s share. Smaller fund managers will need to think about new approaches and tools to get not only noticed but remembered in the investor community. Personalized, value-added content along with leveraging technology that supports a higher level of investor engagement and discussion is what will drive successful capital raising efforts in 2016 and beyond.
Andre Boreas is the CEO of Quadsight Partners, a marketing and PR consultancy solely focused on the investment management industry. He is a former asset allocator and institutional investor, having been the CIO for a large family office as well as head of manager research for an institutional investment consultant.