Growing a fund’s assets under management must necessarily be a key concern for new and emerging hedge funds, perhaps more so for the latter, in as much as the emerging fund has already harvested all the low hanging fruit. Offered below are four strategies for consideration.
Single-Family Offices and the Ultra-Wealthy
The ultra-wealthy may be the single greatest opportunity for new and emerging hedge funds to source capital investment. Not only are they more inclined to invest with smaller funds, they also relish the possibility of finding that exceptional money manager before anyone else finds him.
Single-family offices are also an outstanding source for new investment and many have a track- record of investment with small hedge fund firms
Angelo Robles, CEO of the Family Office Association, points out that the successful hedge fund frames its message in ways that align with the objectives and concerns of the single-family office.
Accordingly, being viewed as a thought leader can be critical in persuading the single-family office to commit funds.
High-End Financial Advisors
High-end financial advisors and wealth managers, while not typically a source of capital for hedge funds, they are certainly conduits to reach those who do invest in hedge funds.
An underused approach to making a connection with a small family office or high net worth individual is to create alliances with high-end financial advisors and wealth managers. This can be done in several ways, the best of which is to provide meaningful support services to the financial advisor, then systematically grooming the financial advisor to become an advocate for investment in your fund.
This can be accomplished through street-smart networking and shared product connections, such as private placement life insurance (PPLI), for which demand is growing among the wealthy clients of high-end investment advisors. For example, if the hedge fund is able to offer an excellent solution, in combination with technical and business support, the fund can expect to make an advocate of the advisor, who, in turn, may use the hedge fund as part of their asset allocation with wealthy clients.
However, none of this is likely to happen if the hedge fund’s investment performance is unimpressive.
As more and more ultra-wealthy individuals gravitate toward multi-family offices, new and emerging hedge funds must not overlook their potential for capital investment.
Demonstrating how a hedge fund investment, coupled with working with the multi-family fund manager, will not only be valuable to their ultra-wealthy clients but, will also provide the potential to improve their multifamily office’s financial position, as well as its business development capabilities. A few issues that frequently need to be addressed include:
- Negotiating compensation arrangements
- Identifying appropriate existing ultra-wealthy clients to invest in the hedge fund, including the appropriate framing
- Sourcing new, high-probability ultra-wealthy clients on behalf of the multi-family office
In short, being able to add value to the multi-family office is essential.
Innovative Fee Structures
Most experts agree that new and emerging funds can benefit from adopting more innovative (flexible) fee structures. For example, research by the Alternative Investment Management Association has shown that emerging managers are less flexible on management fees than are larger peers.
While many emerging funds rely on management fees to support the operational costs of doing business, demonstrating some level of innovation with regard to fee structures, can mean the difference between gaining and losing a client.