Friend of the firm Bruce Frumerman penned a useful article for Hedge World today. Full copy of the article can be accessed at the link below.
Opinion: Hedge Fund Marketing Challenges in the Recessionary, Post-Madoff Environment (subscription required)
All hedge fund managers will benefit from Frumerman’s clear insightful comments.
Opinion: Hedge Fund Marketing Challenges in the Recessionary, Post-Madoff Environment
Some excerpts:
…But 2008 has crucially changed both what hedge funds have to report and the marketplace’s perceptions about what hedge fund managers now have to say regarding these three topics.
For the vast majority of hedge funds, performance for 2008 was negative. While the average relative returns for hedge funds were not as bad as that of the Standard & Poor’s 500 stock index, fund managers who delivered positive absolute returns turned out to be the exception rather than the rule. Further rubbing salt into the wound, many fund managers who have been around for a while are sitting not only with bad 2008 numbers, but they now also have to live with the resulting domino effect of deteriorated three- and five-year performance track records as well.
When they did not have a good performance story to tell many managers felt comfort in having a good pedigree story to fall back on in their bios. Unfortunately, the value of having a pedigree, from the investors’ perspective, has also come into question as a result of the Madoff scandal. At least for a while, the value of a quality pedigree—where you were before and what you have done in the world of investing—is going to be overshadowed by prospective investors asking themselves, “But can we trust him?”
Process has also become more suspect. This is not just thanks to Madoff and a matter of “If it sounds too good to be true it probably isn’t.” Yes, we are in an environment where the few bad apples have made investors increasingly suspicious of money managers. But, that aside, after suffering a year of big losses financial advisors and investment committees are under greater pressure to have the next fund managers and strategies they choose to receive their new investment allocations be very defensible decisions. A vast number of strategies that investors thought were sound did poorly last year, so managers under consideration this year have a tougher job of convincing to do.
Implications for 2009:
Educating and persuading people to understand and buy into the Process story of how a manager invests is going to be even more crucial, both for attracting assets to a hedge fund and for keeping them sticky.
Vague sounding explanations about the investment processes behind hedge fund strategies are more often the result of poor communications skills rather than because managers are trying to keep confidential a truly proprietary element of their portfolio management. But forgiving and being willing to overlook a manager’s lack of good communications skills is not the first thing that will come to mind for prospective investors who are presented with hazy explanations about how a portfolio is being run.
Don’t Get Lost In Translation
Further complicating things for the fund manager is that in almost every case a prospect who is pitched in a sales meeting is going to be retelling what he knows about the hedge fund to others involved in their decision making process. He will be speaking to an investment committee, a spouse, an accountant or to an attorney. And they will be retelling the hedge fund’s story to that person or group. So, one of the important sales missions a fund has is to reduce the odds that a prospect will mess up retelling its story.
Opinion: Hedge Fund Marketing Challenges in the Recessionary, Post-Madoff Environment
http://www.hedgeworld.com/news/read_news.cgi?section=edsk&story=edsk323.html
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