The majority of new and smaller fund managers, labor under the illusion that outstanding performance is all that is necessary to attract investors and raise assets. Sadly, this is more a hope than a strategy.
Proactive funds must always be focused on opportunities to raise assets; however, the hedge fund manager’s core expertise lies in managing the portfolio. For this reason, many funds turn to a third-party marketing firm to raise assets for the fund.
What Is a Third-Party Marketing Firm?
In the simplest terms, third-party marketers act as a consulting service to hedge fund managers requiring the expertise of seasoned investment marketing professionals and sales experts. Third-party marketing firms raise assets for hedge funds via existing relationships, which may include institutional investors, high net worth individuals, financial advisors, investment platforms and broker-dealers.
What Is the Cost?
Since management fees are directly proportional to the size of the fund, justifiably, smaller funds are particularly sensitive to costs. The good news for funds using the services of a third party marketer is that many work on a commission only basis.
Of course, third part marketing firms with a strong record of accomplishment may also charge a retainer in addition to a commission, which is a percentage of the management fees on the assets it raises for the hedge fund—up to twenty percent.
Consequently, the out of pocket cost for third party marketing are minimal when compared to the prospects for asset growth.
How to Vet Third Party Marketing Firms
The hedge fund must conduct its due diligence on prospective third party marketing firms and their employees. This process should be analogous to the rigors of preparing a request for proposal for an institutional consultant.
Points to cover include past work experience, current licensing and broker check, asset raising history and referrals from previous hedge fund clients. Other, equally important, concerns are years of experience, number of current clients, the personality and culture of the firm, the scope of its distribution channel expertise, and the amount of time its marketers are able to commit to your hedge fund.
As a new and/or small fund, when selecting an attorney, accountant, compliance firm or technology vendor, one should choose a partner, not simply a service provider. A service provider will deliver services as contracted, in a professional manner, at a reasonable price. In contrast, a partner is a trusted and valuable contributor that acts proactively to comb the competitive landscape, to deliver accurate intelligence, to provide objective insight, to enable your fund to avoid mistakes and to position your firm for success.
Chances are high that partners cost more than do service providers, but the value of a partner pays off in the long run. Raising assets is the direct result of consistent, quality marketing efforts.No one builds a world-class business on the cheap. If you haven’t yet learned the lesson, “you get what you pay for” then you are in the wrong business!