Tips, Traps and Trends
e-letter from HS Marketing
Leveraging Your Communication Alpha
Dear Clients and Friends,
“Communication alpha” may not have found its way into hedge fund managers’ jargon as frequently as the type of alpha associated with achieving stellar performance. Alpha is generally related to a manager’s skill-based returns in excess of benchmarks or risk measures. Nevertheless, “Communication alpha” may be considered a source of value in supporting asset raising and retention objectives, reflecting both the capability and willingness to deliver clear, consistent, frequent messages to investors.
What do investors expect as they are raising the bar on asset allocation criteria? How can managers achieve communication alpha without overstepping regulatory constraints? What are some best practices and traps to avoid? In this e-letter, three industry experts – Eagle Rock’s Jack Killion, Hedge Connection’s Lisa Vioni, and Alston & Bird’s Tim Selby – who shared a recent panel discussion program, “Hedge Fund Marketing & Capital Raising: Opportunities and Constraints,” highlight their views.
What are the Key Trends?
Jack Killion, Managing General Partner & Founder of Eagle Rock Diversified Fund, a fund of hedge funds created in 2001, highlighted trends and implications for managers as follows:
“Some of the key trends I see are: it’s getting tougher for hedge funds to raise capital, particularly smaller ones; investors are demanding more transparency and, with shrinking returns, investors are paying closer attention to the fees and expenses charged by hedge funds. Investors are also taking longer to commit to funds they are considering for the first time and often aim to slowly dollar cost average their investments into the funds they select.
Also, the investor capital that is dominating the hedge fund space is coming primarily from large global institutional type of investors, many with the resources required to do a good job of finding and evaluating hedge funds that meet their objectives. This is particularly crucial when it comes to them deciding whether or not to invest with hedge funds with complex investing and hedging strategies.
We are all living and investing in a global economy with a significant portion of the assets coming into hedge funds being from off-shore investors. Any hedge fund looking to really generate a significant asset base needs to be able to market to and accommodate off shore investors.
From a marketing perspective, it is important that frequent communications be maintained with potential and current investors. Weekly ‘flash’ numbers are a good thing and monthly updates almost mandatory. Investors don’t want to wait a quarter to learn fund results and their reaction to the market. Furthermore, while exceptional Investor Relations leaders can help maintain the connection between portfolio managers and investors, it is critical for fund managers to take an active role in attracting and retaining capital and maintaining solid relationships with all their investors.”
Lisa Vioni, President and CEO of Hedge Connection, where hedge funds and investors come together, highlighted the trend toward business management capabilities as an increasingly important expectation by investors looking beyond pure fund performance. Vioni states that, “Managing a hedge fund is not only trading a portfolio, but running a business. Each fund manager is an entrepreneur building a start-up company. There are many operational components to running a business that have nothing to do with trading. If a manager does not focus on running the business as well as trading the portfolio, he will fail. In fact, about 80% of new hedge funds will go out of business in the first three years because of this reason. Managers tend to be short sited and do not want to spend money on putting the proper people in place like a CFO, Director of Marketing and others, which puts them at a huge business disadvantage to those who do build the proper infrastructure.”
Tim Selby, Partner in the Alternative Investments Practice at law firm Alston & Bird, commented that the hedge fund community has entered an environment of increased regulations. “The use of social media has presented new challenges with analyzing acceptable forms of public communication by fund managers,” he noted.
What are Some Best Practices?
Tip #1: Focus on the 5 “P’s” in communicating your advantages.
People, Philosophy, Process, Performance and Product are all integral to your story. Clearly articulate your means of differentiation or value proposition in each of these key areas. As you focus on running the business, the importance of the “People” factor and related team qualifications, depth of infrastructure, robust operations and human elements are critical to establishing and preserving the trust of investors.
Tip #2: Describe with real examples.
The best way to communicate your investment and/or risk management process is by using case studies as transparently and concisely as possible. Check out the e-letter, Pitch by Examples.
Tip#3: Become an expert presenter.
As Vioni noted, “Making a presentation is another form of communication. One must capture the attention of the audience and teach them something at the same time. You want to establish yourself as an expert during your brief time on stage. Take a look at any one of Steve Job’s keynote speeches. He is a master marketer and communicator. If you can capture just one tenth of what he does, you will make a lasting impression on your audience.”
Be sure to hone your elevator pitch to make a great first impression. If you cannot explain who you are, how you make money and your edge in less than three minutes, then you may appear to not really have an effective management style.
Tip #4: Use social media and multimedia to reinforce your brand.
Your expertise in a niche strategy or your market views may be a great fit for tweeting, blogging and/or participating in online discussion groups. Build a following as the “go-to” educator in your sector, particularly for a less understood or complex strategy. Using multimedia such as videos and webinars can further personalize the relationship-building process, highlight your expertise and strengthen the impact of your communications objectives.
Are there Communication Traps to Avoid?
Trap #1: Unrestricted marketing.
Selby commented, “Registered investment advisers can publicly discuss strategies and market insight but should avoid unrestricted marketing of the performance results of privately offered funds. Unregistered advisers should avoid holding themselves out in any public communication as an investment adviser. Even within a pitch book or investor letter provided to pre-qualified investors, extra care should be taken in communicating outperformance compared to benchmarks, or presenting expected returns and winning trades (investment examples). Performance statements and illustrations must be balanced with the applicable risks.”
Trap #2: Public unsecured access to fund-specific information.
Selby commented, “Managers must establish a pre-existing relationship with potential investors so as to make a determination that they believe the investor is reasonably qualified to invest in their fund.”
You may be tempted to use Linkedin or a conference attendee list for prospecting but managers cannot provide fund performance until establishing a relationship and pre-qualifying the investor’s suitability. A manager’s website must delineate between general descriptive content posted in publicly accessible sections vs. fund-specific information which must be kept in password-protected sections of the website.
Trap #3: Infrequent communication/Inadequate access
Eagle Rock’s Killion states, “Failing to keep investors current on fund developments on a frequent schedule is one sure way to lose investors and their capital, particularly during turbulent market cycles like we have been experiencing. Of course this includes the fund founder and portfolio manager making himself or herself easily available to investing partners and prospects.”
You only have one chance to make a first impression. Contact us for a complimentary evaluation or inquiry. We’ve been in the marketing communications business, serving the alternative investment community, for almost two decades.
Holly Singer, President, HS Marketing, LLC www.hsmarketing.com
Princeton Junction, NJ 08550 | tel. 609.275.1303