The hedge fund industry is in the midst of a major transformation. Overall fund performance in 2008 has been abysmal, and investors are furious at managers’ putting up gates to protect against redemptions. No less an authority than George Soros is predicting that as much as 75 percent of all hedge fund assets will disappear as a result of what the legendary 78-year-old investor calls the worst financial crisis in his lifetime.
Those managers who survive — and there will be many — will need to follow the basic tenets for success in any industry: caring for customers and allocating time, energy and resources to marketing and business development. Such a change would be a significant and welcome one in hedge fund marketing, which in the past was at best underfunded and at worst ignored and distrusted, because, after all, “performance sells itself!”
The traditional model of raising alternative assets relied heavily on assistance from the two pillars of hedge fund marketing — third-party marketers and prime brokerage capital introduction services. Hedge funds came to expect that these outside actors could handle most capital-raising needs and eschewed investment in internal talent and infrastructure to manage marketing and business development.
Early this decade the strategy seemed to work, largely because the pools of both hedge fund talent and sophisticated investors were limited. Yet from 2004 to 2007, as the industry more than doubled in size, too many funds were vying for investor dollars. Introductions alone were not enough to win assets, so prime brokers and third-party marketers focused almost exclusively on bigger funds that could absorb larger investments and generate higher fees. In the past two to three years, it was extremely difficult for funds with less than $500 million to receive any meaningful attention from either group.
In an environment of mass redemptions, however, even the most highly paid, well-connected marketing professional can do little to help a fund grow. Just nine months ago the big three in prime brokerage were investment banks Goldman, Sachs & Co., Morgan Stanley and Bear Stearns Cos. Now hedge funds are diversifying counterparty exposure and assets are flooding to commercial banks and so-called introducing prime brokerage firms with solid custodial relationships. Some of the groups mopping up assets — Fidelity Investments, Bank of New York Mellon Corp., Merlin Securities — do not offer formal capital introduction. Managers are voting with their feet and prioritizing credit quality, brokerage ability and technology over cap intro.
To be successful in the new environment, managers will need to follow the three I’s of hedge fund marketing: Inform, invest and internalize.Inform:
Hedge fund marketing materials generally tend toward the incomprehensible or the numbingly generic. Few managers understand the needs of clients and investors or take the time to answer such fundamental questions as: What is a manager’s edge? How is his product different? And how does it behave in a portfolio? Managers need to return to basics and clearly articulate what they do and why it should be of interest to an investor.Invest:
Hedge fund managers are notoriously reluctant to allocate working capital to business development activities. They need to accept marketing as a core business function and invest in resources that can help them increase and maintain their investor base. At a minimum a hedge fund should plan to spend marketing dollars to present at third-party investor introduction events, make several marketing trips a year, implement client-relationship-management software to manage investor data, create professional marketing materials and, most important of all, hire someone to oversee the program.Internalize:
A hedge fund investment is a bet on a person more than on a strategy. Control over marketing has to be driven internally, with in-house resources. Only an internal marketer can understand the character, philosophy and strategy of a particular fund and have the insight necessary to provide investors with real comfort. In those instances when it makes sense to have a third-party marketer to target a specific investor demographic or geography, the internal marketer should manage the outside relationship.Hedge funds will not vanish, but loose business practices will. In this environment, where a marketing plan, strong relationships and ongoing communication with investors are critical, a good in-house marketer may be a hedge fund manager’s most important asset.
Lisa Vioni is the founder and president of Hedge Connection, the first Web-based marketing platform that offers hedge funds direct access to prequalified, opt-in investor members. Andrew Saunders is managing director of business development at Hedge Connection.
