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The following 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.

Ten years ago, I conducted an impromptu survey of professionals throughout the alternative asset community to find out what really impacts the ability of all constituents, regardless of provider or investment stance, to form meaningful relationships. As I’d said then, alternative products are sold through relational marketing that takes place over time. Alternatives are bought by professional investors (institutions) and sophisticated individuals (family offices, high net worth people) as a means of capturing upside gain and minimizing downside risks across an overall portfolio of holdings.  Always has been, and likely always will be.

So what exactly will help foment this cause for alternative managers?  The survey I conducted in 2012 was of professionals in a position to know about this issue — specifically, prime brokers, third party marketers, and advisors in the wealth industry — and asked them to share their more memorable reflections on what went wrong during face-to-face interchanges between their clients and the investors.  

The issues of note that follow were raised post-meeting between investors and managers, when investors felt comfortable speaking their mind about how they really felt after a face-to-face encounter with a money manager looking to gain their business.  Let’s see if their reactions then still hold true today.

STILL TRUE: Why did they really start this business?  Managers should be prepared to answer the basic question of “Why did you leave your high-paying job to undertake this arduous and risky effort to build a business in a cutthroat environment?”  More importantly, they should be proactive in offering the explanation before being asked. It’s reasonable to expect that investors will want to hear the genesis of the business model without having to probe for it.

VERY MUCH TRUE: How much time are they spending on the road raising money versus managing the investment side of the business? Oftentimes, the start-up manager has a small operation with limited personnel.  If the portfolio manager is on the road attending meetings to gather capital in order to survive, who’s minding the investment shop while that’s happening?  It may take 18-24 months of asset-raising for even a well-planned out organization to reach critical mass in alternatives.  The manager should designate either someone within the group or an outsourced professional to lead this asset-raising effort, minimizing his/her presence at meetings to the appropriate time and place for decision-making.

DEFINITELY SO: What is their real cap size for this strategy? Everyone says they are scalable and repeatable.  But some valuable boutique strategies are fairly limited in scope and investment opportunity set.  When asked this question, managers should be straightforward about their plans for growth, both from an investment universe and from a business perspective.  It makes more sense to discuss what will be feasible for the approach than to spin what isn’t likely to occur and risk setting up a false front.  If the capitalization size for the strategy is $250M, then say so.

A MUCH-IMPROVED METRIC: What attribution information are they really going to provide once we’re in? Managers say they are fully transparent and can provide detailed position statements every month for each investor.  But make sure what’s said in a meeting can be delivered on day one of an investor’s subscribing to the fund.

UM, YES: What a blowhard.  Managers beware: don’t dominate the discussion at the risk of not hearing the questions.  Less is more when trying to impress investors in describing your investment expertise.

THIS STANCE HAS RELAXED IN THE ERA OF ZOOM: I can’t see them as part of our team. Do a little research in advance and conduct the meeting accordingly.  Dress appropriately for the event. Take behavior cues from the level of formal or casual style the investors are demonstrating and act in a manner that meshes with the style of the group. 

STILL VALID: They seem awfully cocky. Don’t let enthusiasm for the business look like conceit.  Managers need to balance passion with restraint and plain good manners to show respect for the investors they are trying to win over. 

TRUE: I wish they had spent more time telling us where they see their strategy working this year.  We know it’s rocky out there, and investors want to determine if a manager can move forward with conviction and success.  Take the investment admonition to heart: ‘Past results are not necessarily indicative of future results.’

YES- DIFFERENT STILL COUNTS: I just don’t get why they think their investment sources are unique.  Just because you say it doesn’t make it so.  Every manager feels they see the winners others miss.  Maybe it’s so, perhaps not.  Managers need to get their rationale clear in advance of meetings and articulate with some specificity how the markets can yield the trading results needed to run the strategy on a long-term basis.  Is it proprietary access to research? Is it an internal systematic process? Whatever the secret sauce is, bottle it and be ready to describe it in 5 minutes or less.  The ability to do so will be worth its weight in gold.

YES, IT’S A BUSINESS RUNNING OTHER PEOPLE’S MONEY: H/She is a smart trader but is h/she a business leader? This comment is the death knell for a fledging business manager.  If portfolio managers come across as immersed in the markets and fully engaged in doing so, they are missing the mark in terms of convincing investors they can also spearhead the management team necessary to create a money management firm.  Unless this impression can be changed, managers might as well spend their time looking for a proprietary trading position for someone else’s business.(SOME ) SIZE MATTERS: I don’t see how they can run the company (being that size) for long.  Unfair or not, investors worry about the management ‘burn rate,’ when start-up capital is being funded externally from the profit able to be generated by the business itself.  They worry about this coloring or jeopardizing the decisions made by the manager, both on the operations side (shortcuts), and the investment side (positions taken on a more aggressive basis than would be the case if funding were not an issue).  Managers need to address where this working capital will come from before it’s raised as an issue of concern.  It can be from their personal stake or from external sources through seeders, angels, or other interest groups, but should be disclosed freely to minimize the assumption that start-up working capital has not been accounted for in advance of asset-raising.

YES, SADLY: Knowing how many dollars h/she is up or down for the day doesn’t constitute (our definition of) risk management.  More important to the wealth set than the ability to make money is the ability to protect money, otherwise known as capital preservation.  Investors in today’s markets are typically driven by a ‘stay rich’ mentality versus a ‘get rich’ quest. The discussion with investors around risk management practices should center on capital preservation and how the methodology undertaken by the manager will achieve this goal.  A detailed recitation on stop/loss triggers is far less effective than a step back to describe the overall process designed to seek upside potential while minimizing downside movements over the long run. 

CANDID COUNTS: Why did he spend so much time telling us how to evaluate them?  Being defensive about explaining the maximum drawdown or the latest lackluster period of returns serves very little purpose to either side of the discussion.  Rather than correct an investor’s method of assessing performance, a manager should address the issues under discussion and work to understand what the investor is trying to ascertain about the performance history.  

A CLASSIC FAUX PAS: If I wanted the pitch book read to me, someone in my own office could have done that.  Is there anything else that needs to be said about this heinous error?  Perhaps restating that it’s a colossal waste of both the investor’s and the manager’s time to have story hour in place of a conversation.  If the pitch book can serve to augment the dialogue and discussion points, fine to use it for illustrative purposes.  But head down reading from the deck is a no-no under every scenario.

BRIEF IS BETTER: When I asked for a trade example, I didn’t mean a dissertation.  This could also fall under the ‘blowhard’ umbrella, but specifically, a drawn-out trading example that drills down into detail no investor cares to hear or learn about is far less effective than a couple of highlights about trades that were successful and why, and trades that went opposite and why.  In all cases, ending with the lessons learned and portfolio adjustments in the wake of the examples serves far better to help an investor understand where a manager is coming from.

EPIC FAIL- BEST MOVE ON: Well, after that meeting, the right trade is to short that manager’s fund.  Or, that was an hour of my life that I can never get back.  Both of these are saying the same thing: the manager blew it.  The meeting was a failure, and waiting for a follow-up appointment is going to be a waste of time.  

A little preparation and some introspection on past meetings that failed to pan out can help managers achieve a better return on positive outcomes moving forward.

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