Last week I directed everyone’s post-holiday attention to making New Year’s Resolutions for investors. Now that everyone has had a week to digest those mantras, get over the soreness you inevitably felt after hitting the gym (for the first time in 12 months) diligently, and have balanced your ketones after a week of low-carb, New Year dieting, I thought it best to turn attention to resolutions for money managers. If you missed last week’s post, you can find it HERE. For those of you still looking to make a few investing resolutions for 2015, read on.
Money Manager Resolutions:
I resolve to create a business plan around capital raising – Raising and maintaining assets under management has perhaps become as critical as performance. Don’t believe me? Look at recent fund closures. Paul Tudor Jones just announced the shuttering of his longest standing fund, which at $300 million was absorbing a disproportionate amount of firm resources. Merchants Gate, which peaked at $2.3 billion in AUM, decided to close as assets shrank to $1.1 billion, despite above average performance. Woodbine Capital closed after assets dipped to $400 million. Indeed, during the first half of 2014, Hedge Fund Research (HFR) reported that 461 funds closed, which was on pace to equal or exceed the worst year on record for hedge fund liquidations: 2009.
While many people believe that hedge funds “fail” in a blaze of glory a la Amaranth or Galleon, most hedge funds die a death of 1,000 cuts, either never gaining enough performance traction or amassing enough assets to create a sustainable business. According to a 2012 Citi Prime Services report, hedge funds now need between $250 million and $375 million just to break even, and the relatively large closures listed above make me believe the number may be closer to the higher end of that spectrum.
So, with ten hedge fund firms accounting for 57 percent of asset flows in 2014, what’s a fund to do? At the very least, make a plan. If I’ve said it before, I’ll say it again: Your capital raising efforts should be executed like Sherman marching through Georgia in 2015.
We all talk about the “business and operational risk” in hedge funds, and I, for one, would include an effective capital raising (and retention) strategy as one of those risks. Without an effective asset raising campaign, a hedge fund manager may have to:
1) Spend more time on capital raising, potentially taking time away from generating strong performance;
2) Worry more about redemptions. Any redemption payouts will likely have to be liquidated from the active portfolio, potentially compromising returns;
3) Lower the investment minimum so investors will invest (and not be too large of a percentage of the fund). Sure, more investors is great, but client communications will also take more time;
4) Constantly assuage investor (their own and their employees) fears about the long-term sustainability of the fund.
In 2015, make a plan for capital raising. Pick three to four conferences with a high concentration of potential investors and really work them. Get on the speaking faculty. Get the attendee list in advance and set up meetings before you arrive. Have great materials available. Practice your elevator pitch. After the event, have a plan for follow up. Write great investor letters. Polish your performance template. Host a webinar on your strategy. Hire a writer/capital raiser/graphic designer or whatever you need to fill in the gaps. People are already predicting 2015 will be a worse year for hedge fund closures – Let’s prove folks wrong.
(NOTE: This does not mean I don't think there is still a place for small, niche funds. If a manager is content and profitable and generating returns smaller, that's fantastic, and needed in the industry).
I resolve to find my own niche, but not tell everyone I’m the only one there – If I read the words “Our competitive advantage is our fundamental, bottoms-up [sic] stock picking” one more time, I will put out my own eye with a pencil. It’s very hard for a traditional stock picker to demonstrate alpha right now, so you must find, demonstrate and articulate an edge.
The fact is, many of the investors to whom I speak have vanilla investing covered. Whether it’s equities, private equity or credit, if it ain’t something they can’t do themselves, they aren’t likely to invest. If you do something really unique or spectacularly well, make sure you highlight that in every conversation and in all of your marketing efforts. For example, I’ve seen managers with great equity strategies market themselves as simple long/short funds, when in fact there is much more meat in their burger. Don't hide your light under an anemically worded bushel.
With that being said, I think if I hear “I am the only one who is long ________ now” one more time, I will poke out my eardrums with a number two pencil. Hubris is never attractive, and it can result in some spectacular losses. Just ask Long Term Capital Management.
At the end of the day, you often need other folks to figure out the equation (although preferably after you do) in order for your ideas to generate returns. If no one else ever unearths your undiscovered company, or piles into energy, or gets on your disruptive bandwagon, you’ll end up holding a nice position at par for a really long time. Not as attractive, eh? Explain why you're early in, but also why others will eventually get the memo for the best results.
I resolve to stick to my guns – This one may be tough. With the amount of pressure on money managers to outperform, avoid all losses, lower fees and generally walk on water, it can be hard to stay with a strategy that hasn’t been shooting the lights out, hold the line on fees to protect a fund’s long-term viability or not branch into strategies where expertise may be lacking. It’s also a fine line between maintaining conviction and riding an idea or stock to the bottom. For the most part, trust what you know. Explain when you have to. But always at least listen to what others and your intuition are telling you.
Wishing all of us a safe, happy and prosperous year!