Founders of new hedge funds often start with their own money, the money of relatives, the money of friends or some combination of the three. The fledgling money manager’s immediate, if not only concern, is investing those funds to make gains for himself, his relatives and his friends.
This Is a Common Mistake
At the very inception of the fund, it must be acknowledged that every hedge fund has two basic functions: investing capital and raising capital and everything else, such as research, compliance, and administration is in support of these two basic functions, raising capital and investing capital.
It follows that a hedge fund needs a Chief Marketing Officer (CMO) as much as it needs a Chief Investment Officer (CIO).
Too many startups believe that robust returns are all that is needed and that once the gains are achieved, the money will find them and begin rolling in. In truth, hedge fund managers that fail to attend to the marketing function early in the life of their fund, almost always fail to achieve their funding objectives.
We all know that many funds with less than stellar returns still manage to generate strong capital inflows. This is not luck, nor is it an accident…this is marketing!
How Does Marketing Generate Capital Inflows?
Marketing accomplishes this in a number of ways, but possibly the most important is to provide the fund with a high level of visibility. There are more than ten thousand hedge fund firms and marketing’s first job is to make yours stand out. However, it is also important that your firm stand out in a positive way. Consequently, it is imperative that your firm earns a sound reputation among its targeted investors and demonstrates the best overall value or perceived value to these investors.
Marketing achieves this with a CMO that effectively executes a cogent and cohesive strategy, just as the CIO executes his investment strategy.
Today’s environment is a challenging one for the hedge fund industry. Investor demands are changing. They seek not only gains, but also transparency. Additionally, investors seek concessions in terms of management and performance fees. Meanwhile, managers are fiercely focused on operational efficiency and costs in order to maintain margins, because, as we know, even managers that are successful in generating gains, do not necessarily achieve improvements in margins. Small wonder a hedge fund firm needs someone to focus on marketing!
Allocate the Resources
This takes us back to the initial premise that a hedge fund has two basic functions…investing capital and raising capital. Raising capital requires an allocation to fund those marketing efforts, which are essential to raising capital in a highly competitive environment.
Breaking through the plethora of investment choices and making the case for a hedge fund firm’s strategy is no easy task. However, allocating the resources necessary for effective marketing is key to the holistic success of the firm.
Many firms make a decision against spending time and money on marketing efforts in the first year or two or three, until a track record of performance has been achieved. As many shuttered firms can attest, this is a mistake.