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Raising Hedge Fund Assets | New Market Requires New Strategies

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As part of our ongoing discussion on how to raise assets for hedge funds, today we have another guest post from Karl Cole-Frieman who specializes in providing legal advice to hedge funds and other alternative asset managers. Mr. Cole-Frieman specializes in Loan Trading and Distressed Debt Transactions, ISDAs, Soft Dollars and Commission Management arrangements, and Wage and Hour Law Matters among other legal matters which hedge fund managers face on a day to day basis.

The article below details the strategies which hedge fund managers should consider when creating a marketing strategy for their fund.

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AWAI Panel: How Growing Funds Can Beat the Odds in the “New” Market

By Karl Cole-Frieman, www.colefrieman.com

On September 24, 2009, we attended a panel organized by the Association of Women in Alternative Investing, and sponsored by Pillsbury Winthrop at Pillsbury’s offices in San Francisco. The panel consisted of several extremely experienced hedge fund professionals and was moderated by Angela Osborne, Senior Director of Global Cash & Derivatives Operations at BGI. Prior to joining BGI, Angela was Head of West Coast Client Service at Morgan Stanley Prime Brokerage.

The other panelists were:

Nicole Civitello, Capital Introduction at BNP Paribas. Nicole was formerly at Bank of America Prime Brokerage in New York and San Francisco (BofA Prime Brokerage was sold to BNP in 2008).
Ildiko Duckor, Counsel at Pillsbury Winthrop. Ildi had previously been Counsel at Howard Rice, and has represented hedge fund managers for many years.
Robin Fink, Head of Prime Brokerage Sales at Jefferies & Company, Inc. Jefferies has been aggressively increasing its market share in prime brokerage, and Robin has been leading that effort on the West Coast.

The panel began with an overview by Ildi Duckor regarding proposed regulatory changes relating to the hedge fund industry.

Develop a Strategic Marketing Plan

The discussion then moved to ideas for successful marketing, and we thought the panel’s insights were useful.

Nicole Civitello emphasized developing a strategic marketing plan. She made the following points about developing a plan:

Targeting the right investors. For example, start up managers should not target corporate pensions and other investors that will require a lengthy track record. Instead, start up managers should look to friends and family investors and family offices for initial capital.
Understanding the investors. Managers should research potential investors the same way they research investment ideas. They can use their personal network or capital introduction resources for help with this. Robin Fink added that managers should do their homework to understand an investor’s strategy.
Invest in CRM software. Managers should invest in customer relationship management software to track investor communications, feedback and follow-up actions.
Increase dialogue with investors. This could be face to face meeting, conference calls, quarterly or monthly letters. Panelists indicated that this is a trend in the industry. Ildi Duckor suggested that conference calls are optimal because they can be well scripted to keep on message.
Dedicated Investor Relations function. Firms that lost assets in the last year often did not have a dedicated investor relations function to communicate with investors.

Portfolio Managers and Marketing

There also was a discussion about whether Portfolio Managers should be the main marketing face to investors. Ildi Duckor emphasized that whoever is before investors should be familiar with both the strategy and the documents. Nicole Civitello noted that many investors want to see the Portfolio Managers early because inevitably there are questions that a marketing person will be unable to answer and, if the Portfolio Manager is not available, the investor will need to have a second meeting. Robin Fink noted that marketing professionals in 2009 need to have an intimate knowledge of the portfolio and a granular understanding of the business. They need to be more than executive secretaries planning trips and meetings.

Due Diligence in the Post-Madoff Environment

Another topic addressed by the panel that is of interest to hedge fund managers is due diligence in the post-Madoff envornment. Nicole Civitello laid out the landscape in 2009:

Longer review period. In the past, investors often made investments after looking at a fund for three to six months. Now the timeline has shifted to six months to a year or longer.
Flows to managers in 2009. Flows in 2009 have generally gone to the following: (a)Funds that outperformed on a relative basis in 2008; (b) Funds previously closed to new investments; and (c) Funds tracked by an investor for several years.
Transparency. It was emphasized by all of the panelists that investors are demanding more transparency.

Ildi Duckor noted a focus on operations by investors, and a movement away from self-administration. The practical effect of this for startup managers is that they will not be able to give management fee concessions because they will need the management fees for increased operational costs.

Angela Osborne also noted that successful hedge fund managers have cohesion between the front and the back offices. Great stock pickers are not necessarily great business managers, and they should be thoughtful in bringing in talent to run the business.

To find out more about marketing issues for hedge fund managers and other topics impacting hedge fund managers, please contact Karl Cole-Frieman of Cole-Frieman & Mallon LLP (www.colefrieman.com) at 415-352-2300 or [email protected].

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund or if you are a current hedge fund manager with questions about the laws regarding raising hedge fund assets, please contact us or call Mr. Mallon directly at 415-868-5345. Other related hedge fund law articles include:

Raising Hedge Fund Capital is Not Easy

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I have written before that the biggest issue start-up and emerging hedge fund managers face is raising capital for their funds. I seem to have the same conversation on a weekly basis – the “how to do I grow my fund” conversation. Unfortunately I do not have the guaranteed step-by-step guide to raising boatloads of capital, but that is not to say that smaller managers cannot raise capital. I have seen plenty of groups who have made it over the proverbial hump by working ridiculously hard.

The article below (written by Richard Wilson of Hedge Fund Blogger) discusses some ideas that managers will want to consider when developing a program to raise hedge fund capital. Richard’s group provides consulting services and helps managers to raise money for their hedge funds.

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This is Bad News: There is NO Magic Bullet
Richard Wilson

The bad news is there is no magic bullet to raising capital. I spoke with at least a dozen managers this past week at our Hedge Fund Premium networking event in Chicago. Most were looking for capital raising help of some type and we discussed many roadblocks that managers are seeing between them and the AUM levels they are trying to achieve.

Our firm provides some capital raising tools, but I believe that daily action and discipline is the best thing that a fund can do to raise capital. They must take responsibility for marketing their fund and have someone reaching out to new investors on a daily basis, if they do not they will forever remain in the bottom 20% of the industry in terms of assets. Very few funds gain their initial assets through a super powerful third party marketing firms, third party marketers like to typically work with managers which have some AUM momentum or foundation underneath them.

To raise capital I believe that managers need to have superior tools and processes when compared to their competitors. This means superior investor cultivation processes in place, superior investor relationships management, superior marketing materials, superior outreach efforts, superior email marketing, and superior focus on investors which actually have the potential of making an investment. Each of those topics mentioned above could be discussed for a whole conference and all of these moving parts need to be in place to compete in today’s industry. While this does not mean you need to out-spend others you do need to strategically plan your marketing campaign.

There is a good quote that I heard which goes something like “If you want to have what others don’t you have to do what others won’t” In other words if you want to grow assets you must put in the extra work, planning, and strategy that others skip over.

Every morning I try to listen to a 45 minute custom MP3 audio session of business lessons, marketing tips and positive thinking notes. One great quote I hear every morning by our friend Brian Tracy, “Successful people dislike to do the same things that unsuccessful people dislike to do, but successful people get them done anyways because that is what they know is the price of success.” This is connected to an interview Brian conducts in which a multi-millionaire says that success is easy, “you must decide exactly what it is you want, and then pay the price to get to that point.”

All of this may sound wishy washy or non-exact but I think it is very important to realize that there is no one single magic bullet for raising capital. It takes hard work, trial and a superior effort on all fronts to stand out from your competition.

Read dozens of additional articles like this within our Marketing & Sales Guide.

– Richard

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about investment adviser registration with the SEC or state securities commission, please call Mr. Mallon directly at 415-296-8510.

Start your hedge fund today with less than $1 million…

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Can a manager lauch a successful hedge fund with less than $1 million in assets? Yes.

While having a large amount of AUM when starting out can be helpful, start up hedge fund managers do not necessarily need to start with a large asset base to have a large, successful hedge fund. Case in point – David Einhorn. David Einhorn started his hedge fund in 1996 with $900,000. His Greenlight Capital fund now has AUM of around $5 billion. Continue reading →