For Hedge Funds, AUM Matters
BHA estimates that there are about 10,000 hedge funds in the world. Of those, there are thousands that fall into the emerging manager category: funds that have a track record of less than two years or less than $100 million under management. The question for many of these emerging managers is, How do I get to the point where I am no longer considered ”emerging” and can legitimately market my fund to institutional investors? The short answer to that question is, raise $100 million and run a profitable business for at least three years. But, there are other bridges to cross in order to be able to effectively market to institutional investors.
Building a solid infrastructure around the fund’s management team is extremely important. Institutional managers almost never invest in a fund run by a few brilliant traders and a Bloomberg terminal, regardless of the fund’s AUM, performance, and track record. These types of investors need to see strong risk management capabilities and individuals dedicated to handling investors’ needs, among countless other compliance and operational officers.
This is even truer today after the meltdown of 2007-2008. During that period many firms’ invested assets plummeted in value by 20 to 25 percent. Therefore, institutions need to feel comfortable with a fund before making an investment. Having the confidence and trust of any investor is the path to an investment.
The first place most fledgling fund managers turn to raise capital is their personal and professional networks. Here, the relationships have already been built. All a manager needs to do is convince these friends, family members, former colleagues, and business acquaintances that he has a good, profitable product. Once this network has been exhausted, however, the fund manager has to begin tapping new resources to find investors. Sadly enough, the days of sitting back and waiting for an onslaught of investors clamoring to give you their hard-earned dollars is long gone (especially for emerging managers). Managers looking to raise capital need to engage in outbound marketing.
Established managers with a significant revenue flow from management fees often look to capital introduction services or third-party marketers for outbound marketing support. However, these options often come with large price tags or an asset sharing structure that is less than ideal for a fund that needs to keep every dollar it raises in pursuit of the illustrious $100 million mark.
Other managers may turn to a service like BHA’s that is more affordable and doesn’t take a cut of allocations gathered. However, for emerging managers still building their internal infrastructure, a simple contact database or list is perhaps the most cost effective means for identifying new investors.
Some of these contact lists come from fellow managers trading data sets; others are purchased online from third parties. However, the problem with many contact lists is that their information is either out of date or very out of date: at least 12 to 18 months out of date. This means that the fund’s marketer has to spend valuable time verifying contacts instead of building relationships. BHA analysts estimate that it takes five to ten phone calls (spanning the course of two to three weeks) to gather the relevant information about who the proper contacts are and what the firm is currently looking for. Thus, with a standard contact database, the fund’s marketer has to make those verification calls before a legitimate introduction can be made.
Everyone knows the old adage that time is money, and here, clearly, time and money are being wasted due to the stale data that the marketer is using. What emerging managers need is a product that provides fresh, accurate data about investors and their search preferences. This way, marketers can effectively target investors interested in their funds, and get in touch with the right people at those firms without having to make five to ten verification calls.
With an effective and targeted marketing process in place, emerging managers can focus on their performance. With a marketer targeting legitimate prospects, and the fund putting up respectable numbers, productive relationships can be built with investors. From these relationships stem new allocations, whether the investment is in the near term or at some point down the line. After these allocations push the fund above $100 million, larger institutional investors will consider the fund. From there, it is up to the marketer to correctly locate these new investors while the manager complements those efforts with impressive performance to keep the process rolling.