Tag Archives: investor relations

Survival Skills for the Hedge Fund Apocalypse

GrimReaperThere’s an increasing volume of negative news regarding the “exodus from hedge funds,” in favor of less expensive alternatives such as liquid alts and “engineered equity” products. Although many large investors still maintain significant assets in hedge funds, the industry’s ratio of contributions to withdrawals has turned south, and the near-term outlook for hedge fund growth is not encouraging. Small and medium sized funds are likely to be hardest hit as the asset class falls out of favor.

There’s no short-term marketing panacea to offset what may be a rough road ahead for hedge funds, which is a storm that hedge funds have helped to create. More specifically, the industry’s collective lack of basic communication skills is a major contributing factor to the increased levels of investor dissatisfaction. Contrary to what’s reported in the Wall Street Journal, hedge funds are not helpless victims of volatile markets, poor performance or high fees. Instead,hedge funds are now paying the price for their own inability or unwillingness, over at least the past three decades, to explain themselves properly.

Although there are exceptions (which include those funds most likely to fare well over the long term), hedge funds are notoriously inept at expressing to prospective and current investors the “what, why and how” of their value proposition. Collectively, fund managers may be geniuses at left-brain, quantitative skills; but often fail miserably at managing right-brain storytelling skills, or at hiring right-brain people to manage those tasks properly. And unfortunately for fund managers, it’s those right-brain-related communications skills that can have the most significant influence on investor interest and loyalty.

Here’s the underlying problem: most managers continue to believe – despite a growing mountain of evidence – that investor engagement and longevity is based exclusively on fund performance. So that’s the basis on which they pitch their fund, as well as the standard by which they communicate its value to investors over time. In their opinion, nothing but performance really matters.

What those managers won’t acknowledge is that investors seek fund characteristics that have little or nothing to do with performance. In fact, what investors really want is validation that their allocation decision is sound, that the fund manager is transparent and accessible, and that relevant issues are discussed immediately and honestly.

The most recent de-bunking of the performance myth was produced by Chestnut Advisory Group (Investors Want Hedge Funds to Hedge), which further validates that high returns are not the top reason why investors allocate to hedge funds. Nearly 80% of the investors they surveyed indicated that “risk management” played the most important role in manager selection.

And that’s the fundamental marketing challenge for fund managers: building investor trust through clear and consistent communication, regardless of whether their performance meets, exceeds or falls short of benchmarks.

Building trust through communication in any profession – whether you’re selling accounting services, running for public office, or managing a hedge fund – means establishing and managing customer expectations. Here are three ways your fund can accomplish that goal:

Explain what you believe in. Investors care about what you do, how you do it, and even how you are different from other funds. But explanations of features and benefits do not drive behavior. What actually incents them to allocate and remain with you is based on the power of why. Investors need to know what drives you, what inspires you, what excites you. Your fund’s goal is to do business with the people who believe the same things that you believe. So you need to explain what you believe in.

The power of “why” goes far deeper than marketing strategy; in fact, it’s a human need deeply rooted in our biology, and serves as the foundation for all of our decision-making. To gain a better understanding of the concept, watch this 18-minute TED Talks video (Start With Why) by Simon Sinek. There’s a reason why it’s been viewed more than 26 million times since 2009.

Tell them exactly what you’re thinking. Too often, investor communication consists of boiler-plate, generic language that regurgitates news media headlines on the macro-economic factors that influenced portfolio performance. It’s a rationalization of why (most often bad) things happened, and provides no real perspective on the manager’s thought process. There’s zero insight into the quality of the manager’s thinking, or whether any thinking took place at all.

The investing world is well aware of the frank, detailed explanations in the annual report shareholder letters of Warren Buffett and Jamie Dimon, but a more relatable example of effective investor communication is available from Phil Goldstein of Bulldog Investors, an activist hedge fund focused on extracting value from under-performing closed end funds. Drill down into this newsletter’s (The Brooklyn Investor) coverage to get a sense of Phil’s no-nonsense communication to investors. His communication is simple, sincere, fun to read, and most importantly…builds investor respect and trust.

“Man Up” when things go sideways. It’s difficult to believe that any fund manager would be so short-sighted as to report performance when it’s positive, and then go silent when it’s not. But this spineless communication approach happens with some frequency, and most often involves managers who peg their value to investors solely on performance. For investors, in terms of trust, this is equivalent to playing a round of golf with someone who only writes down his score for a hole when he shoots a par, birdie or eagle. “Good times only” fund managers will always have difficulty finding any investors willing to play that game.

The medical profession provides an interesting corollary that demonstrates the potential benefit of communicating bad news. The University of Michigan studied the impact of improved communication related to medical errors. When their doctors began to explain to patients why an error had occurred and what steps would be taken to avoid it in the future, medical malpractice lawsuits dropped 65%. Customers – whether they be patients or investors – understand that the there are no guarantees in life, and most will respond positively to honest communication.

There’s a tangible payoff for setting and managing investor expectations. According to the Chestnut Advisory Group’s research, trusted asset managers will:

  • Raise significantly more capital
  • Be engaged more quickly
  • Be retained far longer
  • More easily up-sell and cross-sell

That’s a fairly decent return for any hedge fund manager, in exchange for an investment in clear, forthright, consistent communication with current and prospective investors.

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Why Your Fund Marketing Strategy Isn’t Working

helpIn manager selection, most investors will look beyond your fund’s track record and give weight to organizational factors that provide them with confidence that the business is well-managed and likely to succeed long-term.

If your strategy and marketing efforts have qualified your fund for an investor’s short list of candidates, then business management factors can either close the deal or disqualify you from further consideration. And with so many funds competing for attention, investors are always looking for any reason to bump funds off their “watch” list.

Like all types of business, your fund’s organizational strength is based on tangible and intangible factors related to the quality of its leadership, the consistency of its operational disciplines and the depth of its customer focus.  On a more granular basis, here’s what those 3 factors entail:

Quality of Leadership: Investors Bet on the Jockey

  • Articulating the Vision…This task is far more complex than sticking a mission statement in a pitch deck or website; it’s a belief system that drives the business. According to Fast Company magazine co-founder, William C. Taylor, leaders at high performing companies are “able to explain, in language that is unique to their field, and compelling to their colleagues and customers, why what they do matters and how they expect to win.” Taylor claims leaders who think differently about their business invariably talkabout it differently as well. Your fund must “talk the walk” to inspire and convince internal and external audiences.
  • Building the Culture…A company’s culture is shaped by how its leadership “walks the talk,” and has a great impact on organizational health and longevity. Some businesses succeed financially in spite of a poisonous or opaque internal culture, but never reach their full potential because the people who work there are not truly engaged. Beyond depicting the traditional org chart, your fund needs to explain to investors how it manages human capital, and must demonstrate how it fosters transparency, communication and teamwork.
  • Thought Leadership…This overused marketing term is typically associated with blog posts and publicity. But bona fide thought leadership is less about self-promotion, and more about acting as a serious student of one’s own professional discipline; whether that be asset management or auto mechanics. Your fund must demonstrate that it’s much more than a one-trick pony with a smart investment formula. Investors want to engage with people who are constantly exploring new ideas and better approaches in their pursuit of excellence.

Operational Discipline: Investors are Business Detail Junkies

  • Working ON the Business…Most business owners are so focused on working AT the businesses (i.e., managing the fund), that they fail to create or properly manage all the internal disciplines necessary for the enterprise to succeed. More importantly, according to Michael Gerber – author of “The E-Myth: Why Small Businesses Don’t Work and What To Do About It” – your fund’s intrinsic value and ability to survive is based on how well it has defined, documented and perfected all of its internal systems and methods. There’s a reason why McDonald’s french fries taste the same in all of its worldwide locations: they constantly work ON the business of sourcing, preparing, cooking and serving french fries.
  • The Outsourcing Challenge…For many businesses, the outsourcing of middle and back office operational functions can make great economic sense. But investors need to know that your fund isn’t simply a “virtual” business composed of a contractual network of various 3rd party providers. If your fund outsources any critical business functions, it needs to assure investors that you (not the outside providers) are 100% accountable for those functions. More importantly, your fund must demonstrate rigorous internal disciplines for oversight that ensure the accuracy, timeliness and quality of all outsourced functions.

Depth of Customer Focus: Investors Need to Like You

  • Accessibility/Affability/Ability…These “Three As” of consultation, taught for decades in medical schools, have application across all service businesses, including fund management. Every type of customer – whether they’re shopping for legal representation, tax advice or portfolio alpha – is influenced as much by your likeability as they are by your college degree, your fancy office or your IQ. Irrespective of its track record, if your fund (as individuals and as an organization) doesn’t come across as friendly, easy to work with and professional, investors are unlikely to explore a relationship. Ego and attitude can be brand liabilities for any business, and fund managers who display those personality traits risk losing out to competitors who may be less talented, but far more likeable and marketable in the eyes of investors.
  • Managing Customer Experience…Many funds don’t even think of investors as customers, but rather as potential beneficiaries of their market insight, trading genius or financial returns. This stilted point of view is often reflected in how those funds communicate and behave, both with prospective and current investors. But the most successful funds understand that investors are people, regardless of the size of the institutions they represent, and that nurturing personal relationships matters. Your fund would be well-served by following the advice of Bruce Temkin, founder of The Temkin Group, and a recognized authority in customer experience, who suggests that all companies:
  • Focus on your customers’ needs, even when internal priorities push them to be ignored.
  • Orient your thinking on customers’ journeys, even when the organization cares about individual interactions.
  • Design for customers’ emotions, even when success and effort are often the better understood parts of an experience.
  • Develop innovative ways to treat customers, even when the status quo seems to be good enough.

Selling performance alone is a dead end for funds, and is the #1 reason why fund marketing strategies fail.

Increasingly, investors are more interested in how funds create and sustain a successful business enterprise. To build a company that provides investors with the confidence to put capital at risk, fund managers must be held to the same high standards of leadership, operational discipline and customer focus that private and public companies face in seeking to attract equity investors.

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Investment-Related Publicity: How Clueless is Your Fund?

According to BNY Mellon’s most recent survey of Investor Relations (IR) practices worldwide, fewer than half of the nearly 700 respondents are using media relations to support their IR goals. More significantly, only 6% of that group included media exposure as a top IR goal.

Whether its reluctance to proactively pursue publicity (also called “earned media”) is based on cost, control, or misunderstanding of the function, the investment industry is failing to take advantage of one of the most powerful means to build investor awareness, third-party endorsement, and assets under management.

Here are some thoughts on how your fund can effectively leverage publicity:

More Publicity is Not Better: The term “media mentions” is broadly used by the investment industry to describe publicity, which implies that the sheer volume of exposure is beneficial. Even if your fund generates piles of press clippings, however, there are too many distractions within print, broadcast, and digital media channels to ensure that target audiences will ever notice, or be influenced by, any of those mentions. A media relations strategy driven by volume rather than substance is an expensive, zero-sum game.

Not All Publicity is Created Equal:  High-value media exposure puts an exclusive spotlight on your fund’s intellectual capital, underlying values or narrative, and typically allows you to control all or most of the content. On that basis, specific types of publicity — such as a firm profile written by a “friendly” journalist, or a one-on-one interview on relevant topics — are far more valuable than simply being mentioned or quoted (often with a competitor or two) in a news story, or providing a sound bite for CNBC.

Create Credibility Tools: The underlying value of media exposure lies in the inherent third-party endorsement that’s provided by a respected, objective media source. (This is why a Wall Street Journal article is more valuable than paid Wall Street Transcript coverage.)  Your goal is to generate media exposure that serves as ad hoc “credibility tools” for your firm, which can be used in your IR program to assure current investors, prospects and referral sources that you are a safe choice. If your publicity doesn’t make your fund’s marketing materials more believable, then the tactic will never have a connection to asset growth.

Plan Media Solicitations Last: Most media exposure is pursued in a haphazard, opportunistic manner. But to generate publicity that has inherent business value, you need to work backwards: first define what specific behavior or opinion you’re attempting to influence, and then determine what type(s) of media exposure will accomplish your goal. Only at that point are you prepared to solicit specific media opportunities that have the potential to drive measurable business outcomes.

Put Your Media Exposure to Work: Too often, media placements are passively hung on a website or a LinkedIn profile like a hunting trophy. But media exposure itself is never the goal; it’s only a means to an end, and must be put to work. Current and prospective investors, referral sources and other key audiences should be consistently reminded – through your positive media exposure – of who you are, what makes you different, and why they should invest with you. This is the tedious but critical step that most firms skip: maintaining a database of important contacts, and nurturing those relationships with those individuals by leveraging their media exposure to drive awareness and engagement.

Slice & Dice for Incremental ROI: In our digital age, there are online opportunities to gain additional mileage from the publicity you generate. For example, if you’ve scored a bylined article in a respected publication, initiate a discussion on the article’s topic within appropriate LinkedIn user groups, and attach a link to the published piece. Or use Twitter to promote your article’s link, by Tweeting (more than once) a provocative observation or quote from the piece to generate interest.

Funds that use media exposure effectively also understand the greatest limitation of the tactic: that no amount of publicity can compensate for an enterprise that lacks a strong value proposition, a clear sense of purpose, and underlying integrity. Without those cornerstones of brand reputation, publicity’s potential to expose a fund’s shortcomings will always represent a liability.

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