The hedge fund industry is the most competitive industry in the world, where portfolio managers are constantly struggling to identify inefficiencies in the capital markets and quickly take advantage of them before their competitors. The most extreme example of this is high frequency traders, whose offices are usually strategically located near exchanges, because every millisecond matters. It is an industry based on survival of the fittest, where managers who don’t succeed at generating strong returns or evolving their firm with changing market dynamics cease to exist. This has especially been the case within the hedge fund of fund market place over the past 5 years.
What is so ironic about this culture is the almost complete lack of focus on having a marketing strategy to take advantage of the upcoming passage of the JOBS ACT. Part of this marketing atrophy has been created by strict historical regulations significantly limiting a hedge fund ability to market themselves. This has created an industry where a majority of assets have been going to firms with the strongest brands and not necessarily the high quality funds. These strong brands often take a very long time to create, however the new JOBS ACT will change this and give hedge fund firms an opportunity to dramatically change the relative position of their brands within the hedge fund industry. Their marketing strategy can be confined to traditional hedge fund investors or be more broadly targeted to go after accredited high net worth individuals.
Agecroft Partners believes this new legislation should prompt all hedge funds to re-evaluate their marketing strategy. Some of the questions that need to be addressed after taking into consideration compliance issues include:
What additional information should be included on websites? Many hedge funds will begin to include information on their organization, investment team, investment philosophy and process, risk controls, performance, terms and service providers. Some might include copies of monthly letters and their due diligence questionnaire. Proprietary information will either be password protected or require a nondisclosure document, however the strong trend is towards greater transparency. Firms should also determine if there should be different protected areas of the website based on which country an investor resides. Other things to consider are website optimization strategies for Google enhanced placement and determining other websites with whom to strategically link.
Should the firm develop an advertising strategy? If so, they need to determine what target market they want to reach. There are many publications that focus on the traditional hedge fund industry and alternative investments. Others focus on specific target markets such as pension funds, endowments, foundations and registered investment advisors. Lastly, there are the more broadly circulated publications and television programs that target high net worth individuals.
In analyzing the various advertising channels it is important to consider how large the circulation is, what percent of the circulation overlaps with the target market the hedge fund is focusing on, and what they charge to advertise. It is imperative that an advertizing budget allow for an advertizing campaign that is repetitive. Placing one add doesn’t do any good. Before beginning an advertizing campaign, it is important to determine what your message is, which should be highly correlated with how the firm wants to be perceived by the market place.
Many hedge funds will dip their toe in the water by targeting those hedge fund publications that are focused on the hedge fund industry, however over time this strategy will be broadened out by many hedge funds to include mainstream media.
Should the firm develop a publicity strategy? Positive publicity can significantly enhance a firm’s brand in the market place. Creating a successful publicity strategy requires significant planning by a firm to identify which media outlets are focused on the target markets the hedge fund organization is trying to reach. This is followed by identifying appropriate contacts at each organization. For print media it is the reporters who target the hedge fund industry and for business television it tends to be the television producers. All of these individuals are inundated with people who would like to be included in stories about their firm or be a source for future stories. These inquiries are going to exponentially increase with the passage of the JOBS act. This is a relationship business that is difficult to break into.
One way to develop strong relationships with the media is to attend conferences they are also attending. One conference this fall that is expected to have large media coverage is Hedgeopolis, which is taking place this November in New York . A good PR firm can add significant value by indentifying who to contact and helping provide access. They will also help their clients on what to say, how to say it, and most importantly what not to say. Typically you only get one shot at a producer or reporter and if you do a good job you will be contacted again.
Should the firm contact a broader universe of investors? There are a number of ways to reach a broader audience. The first is through direct email. There are many databases of hedge fund investors that can be bought on the internet. Most of these have a lot of bad data, but they are a good place to start. Another way to reach new investors is by participating in hedge fund industry databases. Some of these databases may soon be published in mainstream media. In addition, attending industry conferences is a strategy many firms utilize by attending multiple conferences each year. Hedge funds can also reach new investors by leveraging intermediaries such as third party marketing firms or prime brokerage cap intro teams.
What other things need to be considered when targeting HNW individuals? If a firm makes the decision to target high net worth individuals they should consider altering their fund terms by lowering their investment minimum to $100,000 and increasing their fees for accounts below $1 million. They should also create new marketing material structured in paragraph form verses the standard industry bullet pitch book format. In addition, they should consider creating a tiered sales and client service model, where investors of different sizes are treated differently. For example, small clients would not be given individual access to the portfolio manager. It is important to have the appropriate infrastructure in place to handle the additional inquiries, before broadening out the marketing strategy.
Most hedge funds will initially take a ‘wait and see’ approach to observe what strategies are being utilized by other hedge funds, however Agecroft believes that first movers to take advantage of the new regulations will enjoy a material edge in building their brand not only through advertisements, but also the publicity generated by these ads. Long term we expect see hedge funds advertise on television and potentially sponsor major sporting events.
By Donald A. Steinbrugge, CFA
Agecroft Partners, LLC