The following guest post is courtesy of Diane Harrison who is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets.
The Lake Wobegon Effect—where, according to its creator, Garrison Keillor, ‘all the women are strong, all the men are good looking, and all the children are above average’—relates to the tendency to overestimate one’s achievements and capabilities in relation to others. Lake Wobegon seems to be alive and well in the hedge fund industry, where every manager thinks they are above average, despite a wide range of evidence to the contrary.
Yet, some managers truly are better, and investors are keen to allocate to these rare commodities in the alternatives world. Getting fund managers to see themselves clearly and to formulate a strategy encompassing both business plans and growth of assets objectives to maximize their potential value requires skills beyond investment efforts. This goal requires a forward-thinking approach to fund management.
LOOK TO WHERE YOU WANT TO BE AND NOT TO WHERE YOU USED TO BE
Formulating a true business strategy before launching a fund can provide managers with an action plan for growth and sustainability that exists outside the performance factor which tends to dominate the energy and attention of most new managers. Some key questions every new manager should address internally before being asked by an investor might include:
What talent resources—investment and otherwise—do you have in place now and for scaling?
What space planning and operations have you secured for the business itself?
What assessment have you done regarding information gaps and solutions—in other words, what do you know you don’t know?
Have you articulated growth targets and how will you measure when/if you hit them?
How will you adjust on the fly? Do you have several scenarios outlined for action steps to take based on fast growth/medium growth/slow growth?
When or will you consider taking on an equity partner? If when, how will you find prospects to join you?
If you plan to give up equity to gain capital, what is your pitch to attract that equity?
When describing the business to prospects, have you framed the discussion based on where you are heading, not where you’ve been?
NEED TO HAVE, WANT TO HAVE
So what do allocators desire in their hedge fund managers? All of them want managers with solid operational infrastructure, and are quick to strike any manager who presents a shortcoming in this area, regardless of performance. The non-investment risks posed by corporate governance shortcomings are insurmountable no matter what level of AUM a manager possesses.
Virtually all investors also want quality and investment capability in their managers of choice. Regarding this desire, Hedge Fund Intelligence’s Global Review Spring 2016, which surveyed a global forum of allocators, reported an encouraging finding in their Investor Outlook segment from one such large allocator: We evaluate each manager based on their ability to execute their strategy given their size and the markets in which they operate. How refreshing to see a view on value not based upon large-scale assets and decades of experience.
THE WANTS OF INVESTORS DICTATE THE NEEDS FOR MANAGERS
It’s not about you, it’s about me. This is the running theme that investors play in their heads when searching for the right fit in their hedge fund allocations. Many new managers fail to realize the sheer mountain of introductions required to gain even a few actual investors. Imagine how much harder a sell it will be for managers to pursue the wrong types of investors for their strategies. Time wasted trying to convince these elusive investors that they should want a wrong fit product is time wasted, period.
So how can managers target the right types of investors for themselves and tailor their outreach to this audience? What types of investment strategies are investors most interested in for 2016? Referring back the Global Review Spring 2016, several of the strategies favored by leading allocators, consultants, and wealth management firms for the coming year include emerging managers who invest in global equities but with nimbleness and access to the opportunities existing in smaller size positions. The sampling of allocators agreed that no one particular strategy is likely to be dominant in terms of success—some favor quantitative managers, some absolute return, some equities-based, etc. The linking theme for investors is to discover true talent with the ability to execute successfully over a full market cycle.
PLAY IT AGAIN, SAM…
Investors want to preserve a long-term view on their alternative commitments while embracing managers who run their funds with a shorter-term strategy that works in today’s markets. Managers who want to be heard above the din of alternative noise coming at these investors should tune up their marketing approaches to increase their chances of getting noticed by the right investors. Just a few of the alternative strategies themes that are on the radar for 2016 and therefore likely to attract the interest of investors for engagement include:
• The Want for Quant—strategies that address the markets, whether in equities, commodities, interest rates, etc., in a systematic manner that has been proven to have success in varying market conditions.
• Niche is Chic—specialized approaches to selected markets that are less reliant upon the trends of the broader market environment.
• The In and Out Route—strategies focused on long/short positions in US equities with nimbleness and an emphasis on holding positions for shorter timeframes can potentially capitalize on whipsawing or sideways movements in markets.
• The Big Short—approaches that display real skill in capitalizing on utilization of short positions and show promise during periods of volatility across many markets.