Hedge fund managers turn to third party marketing

Date: Monday, June 11, 2012
Author: Tahmina Mannan, Investment Europe

Demand from hedge fund managers for third party marketing and distribution solutions has increased, according to Agecroft Partners, a third party marketeer (TPM).

It said that the TPM industry is experiencing this enhanced interest due to smaller and mid-sized hedge fund managers realising the importance of distribution and marketing via a third party platform.

Smaller hedge fund managers realise that most net flows into the sector is concentrated in a small percentage of firms with the strongest brands, those with assets greater than $5bn from last quarter of 2008 through to 2010.

Don Steinbrugge, managing partner of Agecroft Partners LLC, said: "Beginning in 2011, a small percentage of small and mid-sized hedge funds were able to break away from the crowd by building strong brands, which led them to successfully compete with their larger peers. A high quality product offering and strong historical returns are not enough for smaller mangers to attract capital. They also need to effectively communicate what their differential advantages are in order for investors to have a positive perception of the fund. In addition, they need an effective sales and marketing strategy."

Agecroft's research suggests that current market conditions allow TPMs to shine, as there are a significant number of high quality funds that are having difficulty raising assets. Managers are looking for marketing help because they realise that high-quality marketing is a critical element of a hedge fund's long term survival.

Phil Irvine, director of PiRho Investment Consulting,  said: "A good TPM that has a reputation for being straight forward and representing ‘good' funds, can get a fund noticed above the noise of the crowd. Specialist regional TPM's may be an efficient way for a fund management organisation to gain assets from areas they do not cover well internally. Also almost as importantly, many fund managers are not great at talking to investors and a good TPM can give feedback where they need to improve. It can be awkward for internal marketing teams to give this type of feedback as they have to work with the fund manager on a day to day basis."

The number of hedge funds has grown substantially over the years, and some investors can be contacted by hundreds of managers a week. The top TPMs are said to act like a filter for high quality managers and make it easier for investors to evaluate providers. In addition, a number of high quality firms are difficult to find since they rarely show up in hedge fund databases.

Irvine continued: "The biggest challenge is in selling good small funds where investors say they will invest when it becomes larger. This ‘chicken and egg' problem does not have easy answers, but incentivised TPM's are often more able than internal marketers in gaining initial investors."

Irvine also warned that when selecting a TPM, there needs to be an extensive vetting process: "I don't think all TPMs are equal. Many services of a fund manager can be outsourced and I believe that it is legitimate for marketing to be one of them. However like all outsourced services one needs to feel that they are a) providing value and b) representing the fund in a fair manner. I think it is easiest to judge the quality of TPMs when they are representing new funds with limited track records.

As with most out-sourced partners proper homework is required and not just choose the cheapest. The TPM is often the first point of contact with a new investor and one only makes a first impression once. References should be checked and I think that the TPM should be examined not only on their ability to market but also on how well they really understand the fund and its strategy".