Here is an interview with Alex Bentley, a partner at Coronado Investments, LLC, a third party marketer. He shares his thoughts on the importance of third party marketing and provides some hedge fund marketing insights for smaller firms.
HFMA: It’s a tough time for raising funds, especially for new funds and smaller funds. What steps do these funds need to take, in your opinion, to be successful in this environment?
Bentley: Well, we’re talking in 2010 and coming out of maybe one of the biggest recessions we’ve ever had since the Great Depression. I’ve been in this business for quite a while and this is the hardest time I’ve ever seen to raise money for new funds and small funds.
I would recommend that if you’re thinking of starting a fund today that you basically don’t even waste your time marketing to big institutional investors because they’re just not going to listen.
The best thing you can do is to make sure that you’ve got enough money in the bank for the next two years. Perhaps you’ve got capital from friends and family. Just focus on investing that capital and putting up some good numbers and maybe in two years you can start having real conservations with people.
I would give similar advice to smaller funds. Just work on the network of people who believe in you because right now big investors are not giving money to small funds. It’s just the way it is.
HFMA: They’re staying with the big, established funds. Even if the track records aren’t stellar, they’re just going with safety?
Bentley: They’re going with safety and a lot of big funds that were closed are now open. So they’ve had the opportunity to give money to people who wouldn’t take it in the previous few years. You just have to realize that’s way the world is today.
HFMA: Any other advice you would give to smaller fund managers?
Bentley: My feeling is that in the wake of Madoff scandal and all the other scandals that have come to light is that you absolutely have to have your back office in order. You have to understand that investors are going to be very, very careful about how they allocate their money from a fraud perspective. That means you need administrators.
You need to have procedures in place, about who is authorizing or wiring money in and out of the fund. It’s not about trust, trusting you as a person. And it’s not a negative mark on you as an individual. You just have to realize that investors are going to look at these things very carefully.
HFMA: Aside from having your back office and compliance and governance really buttoned up tight, what else would make a hedge fund or alternative asset fund more marketable in this environment?
Bentley: The same things that have been marketable for years. You have to deliver great performance and you need to have tremendous conviction in your ideas. I have a saying that I like to tell my managers: it’s “Hero to zero and back again.” You know, there are going to be times when you are a genius and there are going to be times when you’re a loser. But you have to stick to your convictions.
And paradoxically, you can’t listen to your investors, either, because they might steer you in a direction that’s against what you believe. You really have to focus on what’s important to you and how you feel you should manage money.
I recently read the book The Big Short: Inside the Doomsday Machine. There’s a part in it where the investors with one guy (he was one of the first people to dig into the sub-prime debacle) were telling him he was crazy, and that he was drifting from what made him a great manager. But during that whole period, he was coming up with one of the greatest trades in history. So you really need to stay focused on your convictions and you’re going to live or die by those convictions.
HFMA: Maybe we could shift over to third party marketers for a moment. Could you comment on how third party marketers add value to the process of raising capital for alternative asset funds?
Bentley: We just do a lot of the grunt work to be perfectly honest with you. You could have a great story and a great background but you still need to get in front of people and tell that story. And you have to be willing to do it over and over and over again.
The question is, how do you do that most efficiently? You want to be telling your story to the right person, and that’s what we do. So, for every meeting or conference call that we set up we might have 25 or 30 conversations that are dead ends. We’re really helping the manager use their time more efficiently.
HFMA: It would be a burden to try and do that at the same time as running a fund, wouldn’t it?
Bentley: And investors don’t like to see that, frankly. They don’t want to see managers spending all their time marketing. Most great managers are not great marketers. Those two don’t often go hand in hand. Now great managers are very good at being passionate about telling their story, but that’s one small part of the marketing process. We try to keep managers focused on that area only.
We don’t want them to spend their time making follow-up calls or filling out due diligence requests or making initial calls to people, leaving messages, all that stuff. That’s a lot of leg work and that’s really what our job is.
HFMA: What would you say makes a great hedge fund marketer, whether it’s a third-party or an internal marketer? What are the qualities of a great marketer?
Bentley: I think you really have to understand how this business works and that you’re dealing with sophisticated investors. They don’t want to be given a hard-sell, Glengarry Glen Ross-style sales pitch. They want somebody who can explain exactly what the manager is doing. And then, they’re either going to move forward or they’re not.
But I think great marketers know when to drop a pitch and move on to something else. If an investor isn’t interested, you just need to move on and focus on the investors who are interested. You have to be patient and you have to respect their process and how they make decisions. If you’re able to do that, you’re going to be a good marketer.
HFMA: And certainly not burn any bridges by pushing too hard.
Bentley: No. Because that’s not going to get you anywhere. A really great investor will have an understanding of what they like and they’ll let you know pretty quickly. That being said, you still have to get them to look at the material.
You know these people are getting hundreds of emails and phone calls a day. So even things that they like they have a hard time getting on their radar screen. So a good marketer has to be able to get to that point, and it’s not easy.
About Coronado Investments
Coronado Investments, LLC is a FINRA-registered broker/dealer and a third party marketer and placement agent for hedge funds, registered investment advisors, and private equity funds.