07/07/2010 Author: Zaki Abushal

The rules of attraction

HFMWeek's June New York Breakfast Briefing saw a panel of hedge fund luminaries tackle the thorny subject of capital raising, shedding some light on the challenge of attracting investor interest and the relative merits of boutique prime brokerages

Raising capital is no fun at all. Just ask the sales staff at any small-to-mid-sized hedge fund. “I am out here for you. You don’t know what it’s like to be ME out here for you. It’s an up-at-dawn, pride-swallowing siege that I will never fully tell you about.” Okay, that wasn’t a hedge fund sales guy, but Jerry Maguire is pretty much the same thing right? And maybe a pride-swallowing siege is probably taking it too far, but you get the gist.

Institutionalisation or not, some things in cap intro will never change, and if you aren’t prepared to get out in front of as many investors as possible then you shouldn’t be in business. The importance of action over inaction was just one of the key points to come out of HFMWeek’s latest New York Breakfast Briefing. Last week’s monthly meeting of the Subscribers’ Club shone a light on the topic of capital-raising and cap intro in the boutique market. Here’s what else the panellists’ had to say:

Alan Alfzan,  McGladrey & Pullen
“Know your business, have a plan not just for this year, but also a set of viable long-term goals”. Simple pointers, but it’s surprising how many managers “forget all of this when approaching both institutional allocators and seeders,” according to Alfzan. Managers also need to offer what investors want. It’s no use putting together a CDO fund when allocators aren’t interested, no matter what your logic. And if you’re stubborn enough to manage an out-of-favour fund, it’s likely you’ll be out on your own since you won’t find a prime broker willing to make an introduction. Cyclically, out-of-favour products aren’t the only ones managers find hard to sell. Activist funds, aside from all the media hype about the strategy, are often no-goes, even for the largest prime brokers.  

Michael Tew, Hayground Cove Asset Management
Large managers can now make money for nothing. The biggest managers will take their fee, which can be somewhere in the region of 3/50 for instance, and farm out the responsibility of managing that capital to another manager at 1/15, although there aren’t many managers that would turn down $500m, whatever the squeeze on fees. Despite this form of hedge fund feudalism, new managers are retaining their relevance through a new-found tolerance for smaller allocations from institutional investors. According to Michael Tew, a lot of positives came out of the 2008 fallout, many were hidden by the false rally in 2009, but investors have had enough time to reflect. Smaller hedge fund managers have undeniably struggled, largely by default as investors searched for cash. Nonetheless, assets under management plummeted for many good managers, pushing them below institutional investors’ minimum AuM requirement levels, and totally off the radar. However, investors finally look to be coming round and are slowly but surely dropping their minimum AuM requirements as they de-risk portfolios and hunt for niche strategies.

Brian Stutman, EFX Prime Services
The brand recognition you crave as a small fund is a vital facet of winning investor trust. The quality of a fund’s service providers – particularly using a bulge-bracket prime broker – can oil the wheels of investor interest, but when it comes to putting a hedge fund manager in front of the right type of investor, they may not be the best option. Boutique primes that have a rolodex of investors willing to make 5m investments are a good option, according to Brian Stutman managing director at EFX Prime Services.

Remember when it was all about performance? Take an upward-pointing graph to investors and they’d hand over the money. Well not anymore, in fact pure performance is nearer the bottom of the investor checklist, than the top. It might get you recognised but it won’t get you any further, according to Stutman. He mentions simple and often missed investment hooks, like “adding another employee to your roster.” Building out the business and not relying on the marquee draw of a big name is crucial; take the recent instance of Horseman Global, which, upon announcing that John Horseman was leaving, saw investors pull $2.5bn. “If there are only three of you, adding more staff will provide support and let the investor know that the business is still a business if the portfolio manager leaves,” said Stutman.