Hedge Fund Marketing: Know the Edge |
Date: Sunday, November 18, 2007
Author: Jacob Bunge
CHICAGO (HedgeWorld.com)—Philip Halpern spent
years managing billions of dollars in assets for institutions like the
University of Chicago, the California Institute of Technology and the
Washington State Investment Board. In that time he oversaw plenty of
allocations to investment managers who came in with a succinct
presentation that illustrated their strategy and how they planned to
execute it.
But Mr. Halpern, now a private investor, also had the misfortune of
enduring meetings that illustrated exactly what not to do. At a Nov. 9
luncheon organized by Cole Partners LLC, he recounted a few of these:
managers fudging the facts on where they went to school, partners
getting into a fight with one another prior to the meeting and firms
sending one of their attractive female employees to the meeting,
instead of someone familiar with the strategy.
"Many of these things may seem obvious and second nature," Mr. Halpern
said, "but I spent about 25 years managing institutional portfolios,
and met with I don't know how many managers, and the things I've seen
are just sort of outrageous."
Many of the current or soon-to-be startup hedge fund managers
in the audience that day may have struck out on their own in part
because they want to be their own boss. Hearing Mr. Halpern's stories
from the trenches, though, they might do well to treat each meeting
with a potential investor as an interview for a job.
Talk about your successes, he said, but it's also important to talk
about your failures, that you understand why they happened and learned
from them. Credentials and experience are important, and it helps
immensely to have other respected investors onboard to vouch for you.
Have your pitch down, but don't get stuck on a script—listen and
respond to your audience. Be able to outline your investment philosophy
and the edge that makes your strategy compelling and different. Oh, and
the performance has to be there too.
Mr. Halpern said he looked for follow-through, the ability for
managers to build out what they have planned. For young firms, having a
chief operational officer and systems in place is important for this.
Knowing the audience is important too—the allocation process at
endowments tends to be very different than at pension plans, and
managers should know if there will be only one meeting or several.
It isn't fair to hold small, startup asset managers to the
standard of a JP Morgan Chase & Co. or another massive firm that
comes in with reams of crisp, neat documents, Mr. Halpern said, adding
that sloppy errors like grammatical mistakes in the manager's
literature can be deadly. "If you make that kind of error, what errors
are you making on trades?" he said.
Brad Cole, president and chief executive of Cole Partners, a
third-party marketing firm and broker-dealer that also runs a natural
resources fund of funds, encouraged managers to think of themselves as
the "sell side" in meetings with potential investors, who represent the
"buy side." Third-party marketers like his firm operate somewhere in
the middle, critiquing the manager's marketing plan and how it is best
applied.
Mr. Cole urged managers starting the fund-raising process to be
critical of everything—the market sector, how the strategy works within
that sector, how the competitors operate and how the firm itself will
operate, whether the manager is content with a couple of Bloomberg
terminals in a basement or is out to conquer the world.
Seed capital providers are one possible avenue, he said, though these
arrangements come with a hefty price tag that usually entails big cuts
of the hedge fund's fees and an expensive buyout in the future. "As a
marketer I should be opposed to these guys," Mr. Cole said, "but we see
some good there." In a highly competitive environment, he said, they
can provide structure, working capital and credibility, getting a
fledgling fund past the first few steps of being a small manager. "But
be prepared for sticker shock," he warned.
The capital introduction services offered by prime brokers is
another venue, though Mr. Cole said that managers ought to approach
these introductions more as presenting information than selling, and
follow-up is critical. Friend and family assets, the launching pad of
many would-be professional investors, provides little credibility with
institutional investors, who will largely discount track records built
this way, he said.
Third-party marketing firms like Cole Partners usually don't get paid
unless an allocation is made, at which point the marketer will take a
portion of the management and performance fees on the assets the
marketer brought in. When entering a relationship with a marketer, Mr.
Cole said it's crucial to spell out the terms of the contract—what the
marketer will do, the time period of the contract and the geographic
area the marketer will cover.
The marketer ought to evaluate the firm's marketing plan, keep track of
which investors have been contacted, and where the manager's time is
best spent. In the meantime, the manager should develop various
versions of his pitch—a 60-minute version, a 30-minute version, a
10-minute panel presentation version, and a one-minute elevator ride
version. "This all comes out of your marketing plan," Mr. Cole said.
Potential investors aren't the only ones looking for
reassurance when a hedge fund starts marketing itself. Rian Akey, vice
president and chief operating officer of Cole Partners, detailed the
due diligence process the firm goes through when considering a new
client for its third-party marketing services. Mr. Akey said he looks
for an understanding of the firm's edge, the manager's background and
experience, and a sense of the firm's existing marketing abilities.
Performance is a factor, but huge returns can sometimes be a little
off-putting—Mr. Akey said he looks for something a little more
realistic that can be sustained year in and year out.
From an operational standpoint, Cole Partners will review the
organization and personnel, looking to see who's handling money and if
there are any convoluted structures or extra entities that don't make
sense. Technology infrastructure is examined, as is the legal history
of the firm and its principals. Past litigation is not an automatic
deal-breaker for Cole Partners, but Mr. Akey said it may help identify
repeated patterns of small issues.
The due diligence process also digs into hedge funds' pricing and risk
policies, with special attention paid to the execution of the fund's
strategy—how many people are involved, who has discretion and how long
it takes before a trade actually goes through. Mr. Akey compared it to
the children's game of telephone, and noted that at some firms a trade
goes through so many people that when it's finally executed it may not
resemble the trade that was originally thought up.
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