Hedge funds enjoyed another month of positive gains in August, with HFR reporting aggregate gains of 0.67 percent, resulting in year-to-date gains of 2 percent, well below the yield on a 2 year U.S. Treasury Note.
Given such anemic returns, how can hedge funds meet their capital raising targets? Consider the following three points.
A dramatic increase in the numbers of high net worth individuals has resulted in a veritable explosion of single-family offices worldwide. Many forward thinking hedge funds are making serious marketing efforts to secure capital investment from this ballooning resource.
Those hedge funds enjoying the most success in raising capital from single-family offices are those that tailor their investment philosophy and approach in a such a way that it resonates with the single-family office being solicited for an investment.
Creating this synergy requires an in depth knowledge of the single-family office being approached. This knowledge can be gleaned from a variety of sources, particularly intermediaries, such as financial advisors, wealth managers, private client lawyers and high-net-worth accountants.
Innovative Fee Structures
A recent emerging manager research report conducted by GPP and AIMA entitled Making it Big, reveals that 20 percent of emerging managers (less than $500 million in assets under management) charge management fees of 2 percent or more, while only 8 percent of the larger managers charge management fees of 2 percent or greater. Additionally, the report discloses the fact that emerging managers exhibit less flexibility on management fees than do larger peers.
The information in this report offers insight into a remarkable opportunity for the emerging manager to incorporate flexibility into any marketing effort geared toward single-family office prospects.
Speaking of marketing, the report shows that 27 percent of the smallest funds ($100 million or less in AUM) spend no money on marketing. Clearly, growing assets under management requires more than flexibility in terms of management fees, but also a strong commitment to marketing.
Management fees are not the single focus of innovation. Increasingly, we are seeing novel approaches to performance fees…approaches that ensure a more palatable alignment of interests between fund and investor. Negotiating fees may be critical to bringing important investors on board at a crucial stage of a fund’s growth.
Targeted Marketing Strategies
Success with any single-family office requires that the fund articulate their investment philosophy and, equally important, the manner in which the fund prosecutes that philosophy, in ways that resonate with the single-family office client. It is critical to understand their world, because the differences between single-family offices and institutional investors are substantial.
Hedge funds that fail to make appropriate adjustments in marketing strategy between single-family office prospects and institutional prospects are likely to fail.
A significant percentage of small and emerging hedge funds may find the answer to raising capital in the single-family office. Hedge funds must be so much more than skilled at investing a client’s money, they must also be proactive and proficient at connecting with and motivating prospective single-family office clients to invest.