When it comes to hedge fund marketing and raising assets, generating momentum can prove to be a tough prospect. Raising capital is all about creating relationships, demonstrating solid results and planning.
New fund managers starting a hedge fund are immediately faced with the prospect of attracting assets from unfamiliar investors who are going to want to see results in order to have an interest in investing in their fund. It’s the chicken and egg quandary for most managers starting out, as one key aspect requires the other.
So, how do you move past the inertia initially encountered to start generating all-important momentum?
Truth is that unless you’re seriously connected or have an existing solid track record in the industry, you’re unlikely to find investors beating down the door to seed your endeavor. Funding is going to come from you, along with family and friends. In that sense, you and your inner circle will be responsible for generating the initial momentum.
To leverage your hedge fund marketing efforts and capitalize on that momentum, you have to quickly work to establish a demonstrable track record, according to Doug Carpenter, CFA, the CEO and owner of Strategic Asset Management, a New York-based full-service fund administration company.
“The lack of a track record is a major issue for most fund managers starting out. Almost everybody tells me they’ve managed their own account for themselves and perhaps a couple of friends…and have done really well,” Carpenter says. “Unfortunately, that’s not a track record. I don’t like to downplay it, but that’s the honest truth. You have to start your fund and get it going. From that point forward, you’re building a track record.”
While working to establish your track record early on, you have to begin to plan your hedge fund marketing strategy to secure future assets, which is predicated on relationship building. According to Carpenter, it’s never too early in the process to start networking and a good place to do so is locally. “In my opinion, more capital is raised early on from church groups, the local Elks Lodge, professional societies and the like. You have to get out and meet these people; let them get to know and trust you and what you do,” he suggests.
Simultaneously, from the very start you need to begin the process of fostering relationships with larger investing groups, such as endowments, money managers and institutional investor groups. Although you might be reluctant doing so starting out, the fact is you can’t just walk in the door one day and expect institutional investors to throw money your way—it’s a long-term process. “When you launch a fund you need to prepare yourself for all your audiences,” Carpenter advises.
You have to prepare for that moment in the future when you go from regular investors to larger groups and then the institutions.
According to Carpenter, the best way to attract institutions to invest in your fund is to get out early and get on their radar—make them aware of you. “You have to let them get to know you personally and track your record and watch real time as you produce results for two years,” he offers. “So working on building those relationships early on is important to creating and leveraging momentum. Fund managers that do so are the kind of people I see successful.”
On the issue of performance, every new manager starting a hedge fund to be careful about swinging for the fences any time they get in new money. “They finally have their fund together and they want to impress the investors, so they shoot for the moon and wind up losing money right out of the gate because they’re not being as careful as they should be,” he warns. “I advise them to think of that portfolio as a glass of wine that may be good or poisoned… so they have to be careful and sip it carefully.”
Overall, when it comes to generating momentum in hedge fund marketing, new managers need to pace themselves and be prepared for dealing with the bad days when an irate investor yells at them for losing money or someone backs out whom they were sure was going to invest $20,000,000.
“Ultimately, raising capital is a lifestyle… This is a game of duration survivability,” Carpenter says. “One of the biggest mistakes I see in newer fund managers is they give up too fast. You have to be in it for the long haul. This is definitely a marathon and not a sprint.”
Bottom line, generating momentum comes down to always looking for opportunities to create and leverage relationships at every stage; and to do so with a long-term vision. For most managers, asset raising will be an ongoing function they will engage in throughout the life of their fund.