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Finding the right fit
Scarcity of investment capital and a cautious approach from institutional investors have hit many smaller hedge fund managers hard, but, according to Andrew Kennedy, COO at recent
success-story Sam Capital, in order to compete, small firms just need to take their time telling their story
It has been an accomplished start to the year for Sam Capital. One of
London’s many smaller hedge funds, the $60m long/short equity manager has seen assets more than double in the last four months, thanks to inflows of around $35m. With the current
asset-raising environment proving a challenge for managers of all sizes, smaller funds have found new investment a particularly valuable commodity, making Sam Capital’s story somewhat
unusual in the scale of its recent success. According to the firm’s COO, Andrew Kennedy, however, there is no secret. Fresh investment, he says, is the product of a much longer process
– one that began with a return to basics.
“Up until November of last year there was almost no dialogue with any new investors at all – the firm was just focused on getting the performance right,” he explains.
“We’ve been getting inflows in every month since December and hopefully that will continue.”
Joining the firm in September, Kennedy’s role was, in part, to build upon Sam’s renewed focus on strategy. With performance satisfactorily tweaked – including a hedged
recalibration to market neutrality from a long/short model
– Kennedy helped remodel the firm’s asset-gathering strategy and target new investors. Recent inflows have largely been down to a handful of smaller funds of hedge funds (FoHFs) and
family offices. More significantly though, the firm has also started discussions with larger institutional investors – large FoHFs, insurance companies and pension
funds.
“As the market stabilised, returns got better and it showed that we were generating consistent outperformance relative to our peer group and the long markets, the next step was getting that
story out and starting to tell people a little bit more about what we’re doing,” Kennedy says. “That’s what began in November of last year and so far so good.”
If establishing – or retuning – solid foundations is step one for the smaller fund, spreading ‘the story’, as Kennedy puts it, is step two. While large, established managers
could, until recently at least, rely almost solely on track-record and word-of-mouth, smaller mangers have an exposure gap to bridge. Media coverage – via such avenues as HFMWeek –
helps in putting smaller, emerging managers on the investor map and prompting enquires.
“It is a challenging environment for raising capital – in any industry,” admits Michael Tew, director of client relations at fund manager Hayground Cove Asset Management.
“Allocators today want to see pedigree and track-record. They’re looking for managers above the $100m mark to verify the strategy is scalable and the manager has the infrastructure to
carry through larger asset pools.” Tew is actively seeking fresh investment for development of New York-based Hayground’s product range. He recommends being targeted, assertive and
detailed. “There are a lot of smaller managers that came out of the crisis successfully but lost assets, and so rebuilding that asset base is a story that every manager has to tell. You see a
lot of managers now telling their story and that, I think, is the key element.”
In terms of generating interest, Kennedy singles out Sam’s prime brokers, or, more specifically, their respective capital introduction teams, for praise. Sam uses cap intro at its prime
brokers, Morgan Stanley and Bank of America Merrill Lynch, and this month added a third, SEB, with the aim of tapping into the Scandinavian markets. Third-party marketing groups have also proved
useful.
“The whole cap intro environment is about telling the story,” Tew adds. “That is: ‘what happened in the last two years; how did you manage through it; what, if anything, has
changed at your firm; were there some key learning points that came out of it; and how do you apply that going forward?’ That story is what investors really want to understand and they are
willing to spend a lot of time doing that.”
COVETED FOR LONGEVITY AND SIZE, institutional money is the holy grail of investment for the smaller manager, and Sam Capital has, so far, only modest experience of the benefits.
The fund already has a small amount of institutional money from a Swiss pension fund. The allocation may be slender, Kennedy concedes, but it has been there from almost day-one.
“They’ve stuck with us throughout,” he says.
A recent upsurge in investment at Stratton Street Capital’s London business – up to $300m from $80m in March 2009 – has driven by specific investor targeting, in this case wealth
managers. The firm’s Guernsey business has also successfully added assets via more unique means, having been appointed as principle manger of two struggling, Guernsey-based property funds.
“The idea is that we’re building a level of assets in the business that then allows us to market to larger institutions,” says the firm’s owner, Andrew Main.
London-based FoHF Culross Global Management has seen an uptick in the number of enquires from institutions since the firm passed $500m in assets during the course of last year. “It’s
hard for us to tell the extent to which the increasingly institutional nature of the enquiries we were receiving was a function of size and how far it was a function of the environment,”
partner Chris Keen admits, however. Most of these enquires seem to be from new or modest hedge fund investors, Keen adds.
Despite being of a smaller size, Sam Capital looks set to increase its institutional pool as a result the recent asset-gathering drive, with environmental factors seeming to play a role.
“What we are seeing is a lot of pension funds which may historically have put their money into FoHFs now looking at making more direct investment themselves into funds, and so we’re
starting to have a number of really good, fruitful dialogues,” says Kennedy.
Negotiations are currently underway at Sam with around 40-50 prospective institutional investors, Kennedy reveals, and the COO is hopeful that 5-10 of these enquires will develop into firm
commitments over the next couple of months. If plans continue along these lines, expectations are that Sam Capital’s AuM will reach $150m by year-end.
“Pension funds do attend cap intro events, but any real dialogue we’ve had with them comes from ongoing one-on-one discussions – by answering a lot of different questions that
they have and them coming and spending time with us to understand what we’re doing. What’s critical from my perspective is that we are able to answer any questions they have so that
they are satisfied with what we do and that we would be an appropriate investment for them to consider.”
WHEN IT COMES TO INSTITUTIONAL MONEY, trust and patience are key, notes Kennedy. “With the larger investors it tends to be a slightly longer investment process. There’s
more comprehensive due diligence. They want to monitor us for a bit longer. Some of them will have certain thresholds in terms of minimum assets under management they require before they will
invest.
“We’ve been spending a lot of time trying to lay that groundwork and building a relationship, so that as we grow they not only get confidence in what we’re doing, but they are
also there as we keep growing to a size where they’re prepared to start allocating. Once they do invest, it’s usually because they’ve looked at you carefully and think you would
sit well within their overall portfolio.”
The new depth of due diligence and focus on a risk profiling means that flexibility on fees, for example, is not as vital as once thought. “If relief on fees does come up, then I think it is
reasonable for funds to ask for longer notice periods,” Kennedy says, “since it’s really about trying to align interests so there’s a certain degree of business stability
that we can provide."
Reporting and transparency are driving demand, and Sam ensures that prospective investors are provided with huge amounts of information. The firm has spent significant time, energy and resources in
building an IT platform designed to provide tremendous reporting and data query functionality. “This has allowed us to start sending out detailed weekly reports to our investors and potential
investors as well as provide detailed responses to specific investor enquiries,” Kennedy explains.
The investor community’s hunger for transparency and regulatory oversight also has Sam Capital considering a new direction. “We’ve had a lot of discussions with interested
investors who have reiterated that they would be intrigued to see a Ucits version of what we’re doing. This is definitely coming from a lot of clients,” says
Kennedy. “It’s something we’re looking very carefully at and there a number of options that we’re considering. We would hope to have something up and running by the end
of the year.”
The appetite for Ucits has certainly benefitted Stratton Street. Almost 75% of its London-based inflows are due to the $170m Ucits product that it launched in September.
As developments at Sam Capital show, opening the door to fresh institutional investment is within the grasp of smaller funds. It comes down to three important steps: establish a winning product,
spread the story of its suc¬cess, and then be prepared to sit down and go into detail.
“If you treat investors as partners, and you have the intention to build as much trust as possible with your partners, then you should be prepared to share as much as you can with them within
the boundaries of confiden¬tiality,” Kennedy concludes. “As long as you can demon¬strate that, then that builds trust – and that’s what inves¬tors are ultimately
looking for.”
THE THREE STEPS TO FRESH INVESTMENT
How small managers should go about securing capital in a turbulent market
MAXIMISE PERFORMANCE
Sam Capital spent almost all of 2009 fine-tuning its strategy so that when it was ready to seek inflows, it was in as strong a position as possible, with a track record to defend. However, some
smaller managers may feel that the best step is to join forces. “Costs in general aren’t going down,” says Andrew Main of Stratton Street Capital. “Give serious thought to
whether you want to stay independent or go with people who are successfully doing it.”
RAISE THE PROFILE
While bigger funds can rely on pedigree and word-of-mouth to spread their story, smaller funds have to roll up their sleeves. Whether it is via capital introductions, specific investor targeting,
or through the media, smaller funds need to put themselves on the investment community’s map. “You have to be very assertive. You have to work extremely hard. You have to understand
from an investor’s perspective what they want and need,” says Hayground Cove’s Michael Tew.
BE PATIENT
Due diligence takes time – investors not only want to get to grips with performance, operations and risk, they now want to understand the firm’s entire journey. “They want to know
the way the business has dealt with the challenges of the downturn.” says Main of Stratton Street Capital. Hayground’s Tew agrees. “That story is what investors really want to get
to know and understand, and they are willing to spend a lot of time doing that.”
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