The stresses faced by a hedge fund manager are many and varied. Beset by burdensome regulations, market uncertainties, geopolitical turmoil, and FOMC interest rate announcements, even the strongest among us would typically bow under the pressure. Though these pressures are great, perhaps the greatest stress occurs at the end of September, when investors turn in year-end redemption notices.
Redemption Is a Huge Concern
Losing customers is a concern for any business, but the repercussions in a hedge fund are far- reaching due to the impact to management fees, the lifeblood of any hedge fund. When one considers that a ten million dollar redemption can cost a hedge fund as much as two hundred thousand dollars, the stress factor becomes apparent.
That is $200,000 which is being used toward the operational costs of running the fund. For small sized funds, it may mean the difference between staying open or shuttering. Nor are large sized funds insulated from the repercussions of redemption. Small wonder this is a stressful time for managers.
Of course, depending upon the fund’s terms, redemption may occur at any time but September 30 tends to be a crucial one for most funds because many investors choose to adjust investment strategies to coincide with the beginning of a new year.
How Can Hedge Fund Managers Mitigate the Stress?
In truth, the time to be concerned about redemption is…always! Hedge fund managers can mitigate the possibility of redemption by building loyalty, fostering sound relationships and delivering quality results. While this may sound simplistic, it is actually not. It requires that managers be committed to their investors 365 day per year by doing these four things:
1) Communicate—Reaching out to one’s clients is crucial. If clients are instigating the majority of interactions, the fund has a problem. Consistent communication are an important factor in building trust and loyalty.
2) Listen—Successful communication requires active listening. By listening to one’s clients, the fund can learn where each investor’s interests lie. Once one has a firm handle on this, adjustments are possible that will enhance the probability of retaining the client.
3) Analyze—Take the time to evaluate a client’s liquidity. A careful analysis of client liquidity can provide the hedge fund manager insights with regard to the likelihood of redemption. This enables the fund to tailor the proper messages to individual clients at the right moment in time. Poorly informed client interactions add no value to the relationship and could potentially drive the client out the door.
4) Confront—When a fund is in tall cotton, communicating with its investors is a joy. However, investor communication is critical when the fund is under performing, unpleasant though it may be. When the fund is down, candid yet positive information regarding future prospects must be shared with the fund’s investors.
Although September 30 will soon be here and gone, the next notice period will be fast upon us. By making these four points a habit, the fund can create loyal investors, based on good relationships and trust. Combined with a well-run firm, this may help to counter performance lapses and retain investors that might otherwise leave the fold.
Regardless of the outcome, having done everything possible to retain one’s investors will relieve the hedge fund manager of much of the stress that surrounds notice periods.