Wednesday, 27 February 2013

Tuesday, 11 December 2012

Hedge Fund Insight Stories Of the Last Month

Most Frequently Shorted UK Shares
By Simon Kerr
The FSA has been gathering information on the short positions held by investors for some time - it has been part of the Hedge Fund Survey for several years.  During the Credit Crunch a disclosure regime for significant net short positions in the stocks of UK financial sector companies was introduced, and then a disclosure regime was introduced for UK stocks undertaking rights issues. Disclosures to the FSA have been required of net short positions of 0.25% of the issued equity or above for stocks of companies in these categories.[read more HERE]

What does it take to be a successful investor?
Whitebox Advisors' Andrew Redleaf on what it takes to be a successful investor: "It requires a certain kind of personality, a certain kind of confidence to be able to act in the face of imperfect knowledge and uncertainty. Also, it requires humility to understand the imperfections in one's knowledge and the inherent uncertainty in the world."

Good Writing Can Help Win Back Investors’ Trust
By Nick Padmorea writer at The Writer the world’s largest language consultancy

Nearly half of all complaints in the investment slice of the financial services industry are about bad customer service or general admin[1].
Back in 2007 Andrew Ross Sorkin at the New York Times wrote this article, claiming that hedge fund managers used a ‘secret language’ made up of ‘technical-sounding explanations for losing billions of dollars of other people’s money’.
And Freakonomics author Stephen Dubner calls the language of economists ‘deeply obtuse’.
If they’re right, it could be that customer service numbers are through the floor partly because people can’t stand the way financial people talk to them. [read more HERE]

Strategic Rethinking Required by European Asset Managers

By Fitch Ratings Paris/London (Aymeric Poizot, Roger Schneider, Richard Woodrow)

In a new report, Fitch Ratings says that European asset managers need to strategically review their product offerings and re-shape their activities by strengthening their key areas of expertise, scaling down or outsourcing others areas, and expanding in neighbouring activities while investing in new areas.

There has been no growth in European assets under management (both funds and mandates) in the past five years, with assets unchanged at USD18trn. In the past three years, only 40% of managers experienced fund inflows and 75 to 80% of inflows concentrated with only the top ten houses across asset classes. [read more HERE]

Increased powers over approved persons for the UK's new regulators

By S.J. Berwin's Financial Markets Group
The UK Government has embarked on a major reform of the UK financial services regulatory structure. Under the proposed changes the FSA will cease to exist in its current form, and three new bodies will be established:  (a) the Financial Policy Committee, (b) the Prudential Regulation Authority (PRA), and (c) the Financial Conduct Authority (FCA). The Bill to implement these changes is currently working its way through the UK parliamentary process and the new structure is expected to be in place by the spring of 2013.
[read more HERE]

An Example Of A News-Based Trading Strategy

There are only a very limited number of funds employing an investment strategy which relies on automated  news gathering. It is still early days in the exploitation of this rich data source, and the spoils of the early adopter are available yet.  So the managers are reluctant to publicly disclose what they are doing and how they are doing it. Plus such media exploitation is typically going on as a feed to a broader strategy or as a sub-fund within a larger multi-strategy investment firm. Unless the approach is the main event at a fund it is unlikely to be discussed in any detail with investors.[read more HERE]

Inside OMAM Quants v2

The first Hedge Fund Insight Podcast is an exploration with Dr. Ian Heslop of how his team operates and it explores some of the structural decisions they have made to manage capital quantitatively at Old Mutual Asset Managers (OMAM).  Ian Heslop is Head of Quantitative Strategies, running a team of five, and he is co-Fund Manager of, amongst other funds, the Old Mutual Global Equity Absolute Return Fund. [read more HERE].

Friday, 5 October 2012

Latest stories on HFI

FRM’s Current Preferred Hedge Fund Strategies
In its latest outlook, FRM, Man Group’s $19.5 billion fund of hedge funds and managed accounts business,  identifies three potential sources of return for hedge funds. The preferences that FRM expresses are based on a specific market outlook.

Cautious Welcome For JOBS Act Proposals
New rules under the proposed JOBS Act are expected to bring dramatic changes to the marketing of hedge funds in the United States.

If there are no such things as coincidences then this dialectic was meant to be seen.  Two opposing views on the oil price came into "Hedge Fund Insight" with 24 hours. Take a read and take a view.

Oil Price To Continue Rising
Says Angelos Damaskos, CEO Sector Investment Managers - read his case here.

Oil Faces Risk Of New 2012 Low
Says Stephen Pope, Managing Partner of Spotlight Ideas - read his case here.

Gold Miners To Outperform Gold
It was quite surprising how well the gold view worked over the last weeks. Obviously, it was greatly supported by the major financial powers of this world. Firstly Mr. Draghi with the announcement of the “unlimited” purchase of government bonds in the Euro-Zone followed by Mr. Bernanke who announced a further disguised QE3 which focuses on the purchase of MBS to the tune of 40 billion US-Dollar.

Physical gold did make the move and begins to tackle the former resistance levels around 1800 followed by 1900. The whole focus continues on gold as investors are assessing the real impact of the money printing on both sides of the Atlantic. However, there are more forgotten sides to the gold trade which are not in the limelight of investors.

Mr Bernanke Goes For Broke
By Stephen Lewis, Chief Economist, Monument Securities

At his press conference yesterday following the FOMC meeting, Mr Bernanke was intent on pointing out that monetary policy is no panacea.  This has been his constant refrain recently, a plea for clemency perhaps in any judgment of the Federal Reserve’s limited success in meeting the terms of its mandate.  Yet, the Bernanke-led Fed continues to act as though it still believes monetary policy alone can turn round the US economy and restore it to full employment.  That is the logic of the FOMC’s decision, should the labour market not improve substantially, to ‘continue its purchases of agency mortgage-backed securities (MBS), undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in the context of price stability’.  This statement presupposes that Fed asset purchases will eventually bring about the desired strengthening in the labour market.  The FOMC does not countenance a situation where the Fed might continue its asset purchases until the cows come home, without achieving the substantial improvement in labour market conditions that it seeks.  Yet, this is a scenario that those who monitor the Fed’s actions increasingly regard as plausible, if not probable.

Friday, 14 September 2012

Top Quotations From Battle Of The Quants

Latest four stories on Hedge Fund Insight:

Top Quotations From Battle Of The Quants London
"An edge in analysis of social media is much more feasible than in analysis of news - there are only six traders globally who are successful trading off news analysis, " Rob Passarella, DataSift.

"There is a huge leap to move from getting  interesting signals to a viable investment strategy," Leigh Drogen, Estimize. Read more >>

SEB Bias Towards RV and Macro In Outlook For Hedge Funds
The market is being driven mainly by investor risk appetite and sentiment, which in turn are driven by unpredictable political decisions. Central bank actions are also driving hedge fund returns to a growing extent, as are hopes for a new round of quantitative easing from the US Federal Reserve (the Fed) or the European Central Bank (ECB)’s potential purchases of government securities from peripheral euro zone countries. Read more >>

SVM Positioned For US Recovery To Beat Expectations
SVM portfolios are currently fully invested, recognising attractive valuations in the UK and Europe and a more encouraging outlook for global growth.  In the US, news in construction, housing and retail suggests that the worst is past. US construction and housing sectors, representing in total one-sixth of the US economy, are steadily recovering.  We believe that US recovery will beat expectations.  US banks are also much better capitalised than UK and European ones, and have largely gone through their write-offs.

Hedge Funds’ Performance? Volenti Non Fit Injuria
The rules on investor eligibility mean hedge fund investing “is not by any enterprised nor taken in hand unadvisedly or lightly; but reverently, discreetly, advisedly, soberly and in the fear of God, duly considering the causes for which alternatives are ordained”. The hedge fund industry has no case to answer against the recurring charges of non-performance and self-enrichment at the expense of clients. Those who invest in hedge funds willingly undertake the investment and operational risks implicit in the niche money-making schemes of the stinking rich. All of the usual criticisms, e.g. the fees, the hidden beta, the lock-ups, the illiquid holdings and the spraying of chic joints’ walls with Tattinger, are all disclosed in the offering documents and/or are writ large in the industry’s track record, which is getting on for thirty years as an investment style.

Wednesday, 15 August 2012

And How Have The Internal Processes Developed At The Endowment To Invest In Hedge Funds?

One of the best things about the flows into the hedge fund industry coming from American investing institutions is that a good proportion of them are from public bodies. Consequently there is very good transparency about the activities in the hedge fund sector of state pension plans, for example.

Through the annual NACUBO study it is feasible to track quantitative information such as allocations to and returns from hedge funds in aggregate across American college endowments.  There can sometimes be good qualitative information about the hedge fund investment programs of college endowments because of the requirement to be publicly accountable. So it is that we can get an insight into the Absolute Return Strategies process at the endowment of the University of California - through the availability of Board papers from the Regents Office.

For a Board Meeting in February this year the hedge fund consultants to the Regents, Albourne Partners, were asked to prepare a memo giving their view of the Manager Selection processes employed in the construction of the UC Absolute Return portfolio, and the competence of the UC Absolute Return Investment Staff. What follows is a lightly edited version of the memo.

The Memo to the Board shows how the investment process for investing in hedge funds evolves at an investing institution. It also gives a real world example of the impact of constraints put on an investment mandate. The limitations of manager size and desired liquidity (ability to deal in the funds) are cited.  The Memo reflects the move away from large multi-strategy managers to try to allocate to emerging managers. And manager fees have been negotiated.

To read the rest of the story click here.

Wednesday, 8 August 2012

Fortress' Logan Circle At The Tipping Point

Across its funds businesses Fortress Investment Group has put in some good returns this year, including from its hedge funds.  Should the superior returns continue, the Group will be well placed to give better profitability to its investors, not the least from Logan Circle, the institutional fixed income manager acquired in April 2010.

The second quarter results from Fortress reflected the significant shift in the split of AUM that has taken place over the last year within the group. Logan Circle continued to accumulate assets at a faster pace than the rest of Fortress Investment Group. At the end of June the Logan Circle AUM were up 40% y-o-y at $18.1bn, well ahead of the Private Equity ($13.8bn) and Credit ($11.5bn) segments of the business in absolute size and growth rates.  AUM in the remaining segment, Liquid Markets, were down 30% y-o-y at $4.4bn.

For comments on Fortress' hedge fund returns, the Group's view on credit markets globally, and a view on the implications for Fortress Investment Group of Logan Circle reaching a tipping point see the rest of this article on "Hedge Fund Insight"  

Tuesday, 7 August 2012

Specialist Manager Series - Selecting Healthcare Stocks with Rhenman & Partners

Selecting Healthcare  Stocks
Hedge Fund Insight” features a series of articles to share the expertise of specialist equity managers. The second looks at the approach taken by Rhenman & Partners Asset Management AB of Stockholm, which specialises in healthcare shares in the hedge fund format.
The requirements of institutional investors in hedge funds can be taxing. They can dictate the terms of business to a hedge fund; they can take nine months of exhaustive due diligence, and large investors have raised the bar across the industry in terms of the rigour of infrastructure and reporting standards they need.

Although survey evidence suggests that the largest American pension plans are considering investing in funds in the $500m-$1bn category, there is not much sign of the capital flows there yet. Investing with smaller, less-well resourced fund management companies will usually require a compromise on standards in some area for an institution. Why would a large insurance company or Endowment go to the bother of having to lay out the inevitable caveats in the proposal to the in-house investment committee?

The answer in one word is performance, in two words is alpha generation and in three words is pattern of return. Investing institutions need to tap into the higher return available from younger, smaller hedge funds, and for which academic studies provide good evidence. The security of management companies’ operating systems is a necessary hygiene factor in hedge fund investment programmes, but they do not justify the effort of investment consultants, funds of hedge funds, advisors, due diligence out-sourcing companies, third-party risk assessors and the dedicated internal investment professionals working on behalf of a state pension plan. Helping to meet the plan desired return target does.

One of the hedge fund investment strategies that give flexible utility to large investing institutions is sector long/short equity funds. The products of sector hedge fund managers can be used in core/non-core structures, in funds split along active/passive line, and where alpha generation is explicitly separated from beta exposures to markets/asset classes. A specialist technology long/short fund could augment a large cap or small cap allocation in a pension fund, or be a substitute within a number of domestic/global equity mandates. Also the investment processes of sector funds should be culturally acceptable to institutional investors as they are always dominated by the application of fundamental research, which meets the preferred bias of the big investors.

A good example is the Rhenman Healthcare Equity Long/Short Fund run by Rhenman & Partners Asset Management AB of Stockholm. Read on

Friday, 3 August 2012

Update of 3rd August

These stories have been posted on
Citadel LLC, the $11bn AUM Chicago-based hedge fund group, has produced some great returns for investors over the long term. In the last calendar year, the two main multi-strategy funds, Kensington Global Strategies and Wellington Fund, both racked up gains of more than 20%. But Citadel has another reputation, aside from very good returns...
A recent article suggested that SWFs are exploring the possibility of buying asset management companies. Could hedge fund management companies be on their radar? The reasons given for buying asset managers are two-fold: to reduce fees and to ramp up investment expertise.
A recent article in the “New York Times” made a a big play about Avenue Capital’s strategic allocation of capital to Europe, which meets  the opportunistic and value-driven approach of founder Marc Lasry. The $3bn of capital is expected to be committed for 3 to 5 years, but is being drip-fed in at roughly $150m  a month .
Markets are funny places, and the things that happen there stranger still. Economic data has been getting steadily soggier from around the world and the eurozone crisis rumbles on, yet global bonds, equities and commodities have turned in sprightly returns for July.
In these treacherous times the degree of macro risk in markets is substantial and it is tempting to try to capture these opportunities. The confident macro trader will certainly argue for the opportunity while the fundamental investor may be confounded by factors beyond their considerations. One of the more controlled ways of investing in the current environment is event driven strategies.
On Monday, July 23rd 2012 2 Euro Zone nations acted in a manner that revealed panic and questionable judgement. In an attempt to prevent “speculative” trades depressing asset values Italy and Spain reintroduced a ban on short selling. This was a response to the tumble in the equity and bond markets.

Friday, 13 July 2012

Update of 13th July

New articles on Hedge Fund Insight:

How Effective Are The FSA/SFO And SEC At Handling Misconduct?

New research from leading securities litigation law firm Labaton Sucharow LLP has today revealed the scale of and attitudes towards misconduct and wrongdoing in the financial services workplace. Just 30 percent of respondents felt their financial regulators and law enforcement authorities effectively deter, investigate and prosecute misconduct—despite these organisations new leadership, record enforcement actions and new reforms.

Small and Mid-Cap Equity HF Managers Receive Heavy Flows
The Top 50 Small-Cap and Mid-Cap (SMID) focused hedge funds have seen their equity assets jump by nearly $7 billion, or 18.8%, since the beginning of the 2012. According to the most recent ranking from, the top SMID Hedge Funds now oversee more than $37 billion in U.S. Equities.

Wednesday, 11 July 2012

Monday, 25 June 2012

Co-Opting Marketing Resources for Hedge Funds - Part Two

Preqin - Building On A Database 

The previous and following articles in this series cover lead generator companies in the hedge fund business who make great efforts to explain that they are not database companies. Preqin is a database company that is trying to add some value beyond that restrictive label, so is coming from a different direction from the other two series subjects, Murano Systems and Brighton House Associates.

Preqin provides data and information on the private equity, real estate, hedge funds and infrastructure sectors. The company started in London in 2002 by making efforts to track private equity information (hence the name) – deal flow, terms, funds, and investor activity. The market intelligence gathered was turned into publications and a database. It was the investor activity that led to Preqin collecting hedge fund related information – there was a lot of overlap among the investors in private equity and hedge funds.

Preqin collated the information the investors (investing institutions, endowments and family offices) gave them into their core hedge fund product, which is a database they call Hedge Fund Investor Profiles. Most alternative investment databases that are sold to marketers are lists of potential targets for the marketer’s product.  And the usual database/list/directory does not make much effort go beyond being a database of contacts.

A contact database typically would have a cursory company profile on a list of targets i.e. North American Family offices.  This data can be found in the public domain from phone directories to websites, and the value of a contact database is that a company or person has taken the time to gather up the data and break it into specific lists or categories.  The value is in the aggregating of the data.  The company profile might have a company name, address, phone number, general area of interest, perhaps some historical information, and the name of the acknowledged head of the organisation.

A Refreshed Contact Database

The Preqin hedge fund database is different from the typical directory-like contact database because it is refreshed on an on-going basis, and carries time-sensitive information. A directory of investor names you can buy relatively cheaply on the internet is an accumulation of all the information gathered to that point – it is a snapshot of standing data and information. Some of the information will be fresh, some will be quite ancient.

Preqin have a dedicated team of analysts proactively contacting industry professionals, monitoring regulatory filings, making FOIA requests and tracking news sources to make the their data and information on all firms, investors and service providers  up to date. The analysts speak to investors at least twice a year, and try to make contact with the larger investors four times a year.

The analysts ask investors in hedge funds what their investment plans are for the next twelve months.  There are two levels of interest captured on the database - actively looking now and tracking a strategy. The information held on the Preqin database is always first-hand, and because of the contact frequency, unlikely to be more than six months old.  This is important in a couple of regards – the investment strategies sought and followed will change over time, and the staff doing the seeking and following will change. Each month around 400 database entries are updated.

Then there is the breadth. Because of the resources applied – 25 to 30 analysts in total – and the period over which data has been gathered, Preqin has a database of investors in hedge funds which is as extensive as any. A directory or list of investor names by category might run to a few hundred fund of hedge funds or pension plans. The Preqin database has 3300 investing institutions, and the firm is currently adding 500 new names a year. For example, at the moment the firm is engaged in a project to identify and contact Foundations, in the process 70-80 names are being added each month.

Of the three providers covered in this series of articles Preqin has the most finely tiered offering by price. At the top of the range is the Premium version of Preqin’s Hedge Fund Investor Profiles.  This gives complete access to all data held for $4,250 p.a. and lists the name, type of investor, background, location, assets under management, current and target allocation to hedge funds, current areas of interest by location and strategy, description of investment plans and key contacts of the investing institutions.

Only the Premium product is downloadable to Excel or the in-house CRM of the client, and can be accessed by 5 users. The Premium product contains consultant information – who works for whom. This is considered essential information in the current hedge fund marketplace as a large part of the industry’s flows are now either mediated by a consultant or advised by consultants.  So hedge fund managers looking for the bigger tickets will buy the Premium version of the Preqin Investor Profiles. As it is, about 70% of Preqin’s clients for hedge fund products take the Premium product.

The Standard Access to Preqin’s Hedge Fund Investor Profiles costs $2,150 p.a. and it enables users to search for investors by location (e.g. list all endowments and foundations in Toronto, Canada), and find investors with specific investment plans (for example, ask who is interested in investing with hedge fund of funds). Another feature is that users can view investors by firm: that is, view which Investors have previously invested with particular hedge fund managers. This can help indicate the biases and investment style of potential clients. So a pitch can be tuned to the sort of thing that the potential investor is known to like, and the fund can be differentiated from unsuccessful investments in the past in the same investment style.

The Standard Access comes with a couple of compromises compared with the Premium Access service of Preqin. The database can be interrogated but not downloaded or linked to a CRM system, and only one user can access the database at a time.  The top-tier of investors on the database can be separately purchased in the form of the Preqin Hedge Fund Investor Review, which is an annual product. The 2012 edition features profiles and analysis for the 1,000 most important investors in hedge funds worldwide, and is keenly-priced at $795. The Review contains listings of investors with a preference for the 10 most important fund strategies.

Entry Level Products

Preqin offer a couple of entry level products: the Emerging Manager Download and the Fund of Funds download, both priced at a great value $1000 one-off cost.

The Emerging Manager Download contains contact details for over 890 institutions that have expressed an interest in investing in emerging managers, making the Emerging Manager Download an excellent way of targeting the high potential investors for a smaller fund. Investors include the full array of hedge fund of funds, public pensions, endowments and family offices and foundations. This Excel download contains details on nearly 3,000 specific contacts at investing institutions including name, position, e-mail and telephone number – sufficient to ensure a new hedge fund manager can contact at least a colleague of the relevant person.

Historically funds of funds have been the biggest allocators to hedge funds and are a necessary investor base for hedge fund managers to hit to raise capital. With the Preqin Fund of Funds download of over 600 allocators the marketer or PM of a hedge fund can searched by strategy, location and typical investment size to pinpoint the firms who may be interested in their vehicle.  The Fund of Hedge Funds Excel download contains contact details, including direct phone number and email address, for more than 2,300 individuals at the 600-odd multi-managers from around the world.  As the firms listed range in size from $10 million to $60 billion they will vary from the nimble to the lumbering, but filtering of the list by individual strategy, region and typical investment preferences tags should throw up a very workable long-list of potential investors.

Preqin has also recognised the increasing influence of consultants to flows in the hedge fund industry in its product range. The Premium version of Hedge Fund Investor Profiles contains consultant information, and in addition there is a dedicated product – the Preqin Alternatives Investment Consultant Review ($695). The 2012 edition contains profiles for over 350 different investment consultancy firms.

Consultant profiles within the Review contain information on the types of services offered, asset classes covered, key financial information, direct contact information for relevant contacts and details showing which consultants are being retained by 1,560 institutional investors from around the world. The review identifies key trends in the consultant universe plus information on the market’s make-up.  Of particular relevance for owners or marketers of single manager hedge fund businesses the Review shows which firms operate a buy-list, which firms consider first-time managers, and what they look for when considering new opportunities. The Review is also relevant to investing institutions looking to benchmark their current consultants or to investors considering the services of consultants.

The other directory-like product from Preqin is the Sovereign Wealth Fund Review, which costs $595 and provides a detailed analysis of sovereign wealth funds and their activity in all different asset classes. The Review contains useful analysis plus full profiles for over 60 sovereign wealth funds worldwide. Of all investors in hedge funds SWFs are perhaps seen as the most desirable – they have stable long-term capital, are professionally managed or advised, and can write very large tickets.

The first article in this series covered lead generator Murano Systems and the next article will feature Brighton House Associates. The final part will also draw some distinctions between the three and how they are positioning themselves, and so will come back to how Preqin is trying to compete more directly with the pure lead generators.

Monday, 11 June 2012

Co-Opting Marketing Resources for Hedge Funds - Part One

Murano Systems, A Lead Generator

In one of the coincidences that inspire, recently two aspects of hedge fund marketing came into view. The first was coming across a small hedge fund using Murano Systems, and the second was a White Paper on the different types of hedge fund investors from Merlin Securities.

The Merlin paper (available here) explores how a hedge fund appeals to different types of investors at the various stages of development and maturity of the fund and its management company.  The advantages and disadvantages of each investor type are mentioned.  The growth of the hedge fund assets and its changing investor profile is conceptually illustrated below. 

Source: Merlin Securities

Marketing in Different Phases of the Life Cycle 

One of the challenges these changes in potential demand give those running hedge fund management businesses is appropriately resourcing the marketing effort. The marketing initiatives a start-up needs to take are very different from the resources and ways of operating of a billion dollar multi-strategy mature hedge fund.  In the case of the large, relatively mature hedge fund marketing may consist of relationship management for the most part, with infrequent capital raising in discrete chunks.  To carry out the marketing in this phase of a hedge fund life may require just one senior big-hitting asset raiser and a support team of junior graduates.

Contrast this with an emerging hedge fund manager who cannot afford a big-hitting asset raiser’s base salary to get him or her through the door, and where the marketing resource may consist of a couple of days a month of the portfolio manager’s time and the operations person sending out batches of e-mails.  If the nascent hedge fund manager does not come from a hedge fund background they may not know many investors in hedge funds at all, nor what they look for or how to identify the right ones for their style of investing.  A seasoned marketer would know those things, but the regular fee income of a small fund would not give room in the budget for a marketing professional. For many, the solution to this chicken-and-egg type conundrum is to use some form of out-sourcing in marketing. Two common forms are the third party marketer and lead generators.

In discussion with the marketer at a small start up hedge fund, Fir Post Capital, that runs a few million dollars and has been going six months or so as independent entity, the name of a new out-sourced capability in marketing came up. The fund run by Fir Post Capital is involved in volatility arbitrage, a somewhat esoteric strategy, even in hedge-fund-land. But the managers had an investor meeting with an American endowment the following week. A fund with this profile having a meeting with an American endowment after a few months of trading is most unusual, so the question came, how come? The answer was that Fir Post uses a lead generator, Murano Systems.

Changing the Odds in  Marketing

In the marketing process lead generators are the next iteration on from databases of investors in hedge funds. As the European end of the hedge fund business blossomed 15 years ago lists of investors were likely to come from the first generation of managers and some of the service providers, and were passed on to the new managers.  Lists were traded and used by third party marketers then - the apocryphal “Rolodex and a smile” from Jermyn Street/Dover Street.

Then around 2000-1 a manager might get a spreadsheet with a hundred names on it from a prime broker’s cap intro team, plus some names from their mates in broking. And just after that time the first rankings of the world’s largest funds of funds businesses came out, giving a basic though un-targeted starting list. Eventually commercial databases and directories came along.  From a broad hedge fund database, the sub-set of funds of hedge funds could be extracted from Investorforce, or Tass.  Even now you can find sellers of directories of investors in hedge funds on the internet.

But both the database and the list are passive, and, in a crowded marketplace of nearly ten thousand hedge funds, the passive approach to identifying investors has been succeeded by the lead generators - Murano Systems, Brighton House Associates and to a degree Preqin.

The argument goes that there are in the region of 40,000 investors in hedge funds in the world, and although cold calling can produce results in many spheres of commercial activity, the hedge fund business is not suited to that approach. Many investors in hedge funds can be as remote as the founders of major hedge fund groups (like King Street) in which they invest.  Rather relationships are seen as being of particular importance. 

Personal contacts are what third party marketers (3PMs) utilise in their efforts to sell hedge funds, but the lead generators are critical of the capacity and scope of 3PMs. There are hundreds of 3PMs, but “two-thirds are no good”, according to an executive at a lead generator.  They say that each individual working as a third party marketer can actively manage only a hundred contacts, everyone else on their 500 list of contacts is a tired data-point rather than reflecting an up-to-date active dialogue. 

The in-house marketing efforts of an emerging hedge fund may be limited to part-time human resource and a long list of investor names from a database. At the emerging manager stage 8/10 funds are using Excel spreadsheet as a sales organiser, with all the pitfalls that entails. There are several very good CRMs that mesh with Outlook available that have been specifically designed for hedge funds. But they cost from upwards of $12,000 per annum, and do not come with client/potential client data loaded. Recent survey data from Citi suggests that large hedge funds spend $35,000 a year on a CRM and $150,000 per year on data for the CRM.

Research suggests that in the hedge fund industry the all-in cost of acquiring clients is as much as $15-20,000 per account for true business development. A start-up or small hedge fund cannot compete with an in-house systematic resource like that, and will have difficulties turning a list of many unknown potential investors into a hot list of engaged potential clients. Lead generators are solutions to those two problems.

The Next Iteration in Marketing

A new entrant is Murano Systems, a spin-off of management consulting firm Perfecta Partners. Ole Rollag CEO of Murano Systems is keen to describe how they are in the process of changing the business model of hedge fund marketing. “Using external professional marketers, even a network of 3PMs in different territories, is a reversion to a hub-and-spoke mode that reflects a cottage industry approach. We offer an industrial scale way to finding the right sort of investors for a hedge fund,” he explains.   Murano, in common with its competitors, aims to qualify the client but to a very detailed, fund specific level. That is, facilitate the fund being put forward to investors who are actively engaged in trying to find a hedge fund of a particular type and characteristic. 

Murano is keen to differentiate its offering: “We are not a database company,” says CEO Rollag. “Our core business is identifying investors that are potentially interested the specific characteristics that our fund clients have on offer. Since we offer a premium service, we allow our clients to have access to the database that pertains to their strategy. They may download all of it for use as long as they respect our restrictions- no bulk emailing or transfer to third parties. We are akin to a dating or matching service that charges the clients (funds) a subscription fee. The ultimate goal is to stop disintermediation, bulk emailing, and annoying the investor with inappropriate funds. If we can understand the investor and their requirements, then our client can approach a select number of investors that have specific requirements:  we find high quality leads for hedge fund managers to act on themselves.” Murano reverses the traditional process of waiting for investors to find managers.

The key human component of the service is the team of analysts – bright, engaging graduates who through 25 completed calls a day keep in a regular structured dialogue with investing institutions. So between them they know what current/prospective demand by strategy is going to be, and who specifically will have it. The same analysts use the fresh demand information they have collected, collated and stored to provide sales/marketing leads to hedge fund managers.

The service typically delivers 3-5 leads a week to hedge fund managers, though less for an esoteric strategy.  The leads are end investors in hedge funds that have disclosed to the researchers that they have are active in looking to allocate to a particular investment strategy, say, convertible bond arbitrage or long/short equity healthcare. The hedge fund marketer or manager will receive their leads in a couple of forms – via a phone call from their account executive at Murano, and in e-form (an e-mail and update of the managers’ own CRM).

Rollag is keen to emphasise the service focus of the Murano offering.  What is standing data in a database is refreshed in this approach – so by its nature it is a constantly-renewed, targeted offering.  In a trial period the potential client will receive the same level of service as a full client – all the analysts are in the loop for communications out, leads are sent in the usual way, and the analyst/client dialogue takes place at least a few times a week. And as such it is subject to service level reviews – a dialogue with clients on how it is going every quarter or so.

From the hedge fund managers’ perspective the marketing spend can be both known and a management control variable. It is easier to vary the budget for a service used than to dynamically manage the human resource needed in marketing a hedge fund. An in-house or independent marketer gets paid for capital flows in; in the case of Murano and their competitors the client pays for the leads rather than the conversion.  In concept the service delivers a higher quality prospect of raising capital with a high degree of management control and influence, which can be very important for entrepreneurial and demanding owners like hedge fund managers.

In Part Two there will be a look at Preqin’s offering – building from a database.