A new holiday fad for fund managers of all ages and denominations! LP On A Shelf (or ELP on a Shelf, as I call him) knows when you've been spending too much time at conferences, when you're creating pitch books that are too long, or when you're not hiring critical personnel (or skill sets) and will tell Santa not to offer you an allocation in the New Year.
Many of the fund managers I speak to remain conflicted about how best to position their diverse asset management firm. While I don’t have all the answers, perhaps I can help shed a little light on the topic for folks. Read this while you’re thinking about your capital raising battle plans for 2019. And may it help you separate who’s been naughty and nice, whose chimney you should visit and whose you should skip in the New Year.
This past Saturday was not unlike most of my recent Saturdays. I woke up around 7:30, fed my seemingly perpetually starving Siamese cats, and contemplated the end of what was yet another *fabulous* infrastructure week here in the good ole U.S. of A, all before heading out to stress shop.
I’ve always said that shopping is my main form of cardio, but you may not know it’s also one of my favorite methods of stress management, too. There’s something about a perfectly climate-controlled dressing room, a commission-based sales rep at my beck and call, and an impeccable frock (or purse, pair of shoes or new iPhone for that matter) that makes everything bad in one’s life feel more like a distant land war in Asia, rather than like a bar fight in your living room.
This weekend, as I was trying on my potential retail spoils, I happened to overhear a conversation in the dressing room adjacent to mine. A mom and a daughter were discussing a sweater, and whether it could be purchased for less money at another store. The objectionable price of said sweater? $30.
Yep you heard me (read me?) – thirty whole American dollars.
My first thought was “You can buy a sweater for 30 bucks?!?”
I mean, I was at the Nordstrom Rack (I may be seriously into retail therapy, but most of the time I see no reason to pay full price for it), but I can’t recall the last time my hands have alighted on a $30 anything, much less knitted goods.
My second thought was “Would you really want to wear a sweater that could be purchased new for $30? What would said sweater be made of? What would this sweater look like? Would this sweater hold up to normal use without starting to resemble Rachel McAdams’s shirts in “Mean Girls?”
I was really struck by two things in the aftermath of the sweater discussion: First, what a privilege it is not to have to worry about spending $30 on a sweater. But second, and more important, how a lot of us have pretty much started to expect everything to be cheap.
Especially when it comes to the investment world.
It’s true that there has been a colossal amount of fee pressure and compression in the investing world over, say, the last 10 to 20 years. For example, active equity mutual funds charged an average of 1.08 percent in 1996, but a mere 0.82 percent by 2016, and equity index funds saw fees plunge from 0.27 percent to 0.09 percent over the same period.And of course, Fidelity upped the low-cost ante even further this year when they announced two no-fee index funds (Tickers: FZROX and FZILX), attracting more than $1 billion in their first month.
One of the investing groups to get the biggest full-court (fullest court?) fee press is hedge funds. In fact, a mid-September Institutional Investor article touted that hedge fund fees had fallen to record levels, with management fees near 1.43% and incentive fees hovering around 17%.(3) Of course, this massive “decline” assumes that hedge fund fees peaked, as often advertised, at 2% and 20%, which I have loudly and repeatedly asserted for years that they didn’t, based in no small part to research that I did in 2010.
This research showed that, at the height of hedge funds’ popularity, and based on a sample of more than 8,000 funds, management fees for funds that launched in 2009 averaged 1.65%, up from 1.35% for 2000 vintage year funds. Likewise, incentive fees during the period were largely stable. They clocked in at 18.7% for vintage year 2000 funds and dropped to 18.5% for hedge funds launched in 2009. So, while there has been a decline in average headline fees (the fees charged per Offering Documents, not negotiated for large investors, longer-lockups or founders’ shares), it hasn’t been a dramatic as one may think.
But the bigger question that many have asked is “how low can fees go?” And that, much like my $30 sweater conundrum, is an excellent question.
The rise of index tracking, low-cost ETFs, and the decade of stellar performance of the same, has led some investors to believe all returns should come cheap. But even leaving aside market cyclicality and the active/passive debate, there’s a pretty big difference between mammoth firms like Fidelity or Vanguard offering funds for three basis points and a $100 million hedge fund, private equity / venture fund or even most long-only active managers offering the same.
The primary issue is economies of scale – Vanguard managed $5.1 trillion (with a “T”) as of January 2018. Blackrock managed $6.317 trillion (again, with a “T”) as of March 2018. Fidelity managed $2.45 capital T trillion as of the end of 2017. If Fidelity charges an average of three bps on its assets under management, it still generates a helluva lot (with an “H”) in fee income.
If Jo Schmoe Fund does the same while managing $100 million, they spit out a paltry $300,000 in revenue. Even if Jo earns a hefty return on investment, triggering the payment of an incentive allocation, that still may not be big enough dollars to run an institutional quality business.
Even if JS Capital Management manages to grow assets to ONE BIIILLEON DOLLARS, they might be able to buy a metric crapton of $30 sweaters charging 3 bps, but running a legit asset management business? I wouldn’t always count on it. Sure, they’d rake in $20 million on a 10% performance year (assuming a 20% incentive allocation), but not every year turns out that way.
There are some years, thought we may not remember them well, where it would be considered outstanding performance to be flat. There are some years when a strategy just isn’t in favor. There are some years when stuff just doesn’t go your way. Do you want to incentivize a manager to use excess leverage, to under hire, to spend all their time trying to raise additional assets so they make a decent buck, or to take undue risks with your capital?
I’m not sure I do. Which is why I didn’t pop my head out of the dressing room to snatch up the mysteriously alluring, though inexpensive $30 sweater on Saturday. The risks of contact dermatitis, catastrophic sweater failure and potential public ridicule were just too great.
Last night, I flew home from San Fran on the redeye after attending not one, but two, conferences in San Fran. Normally, I’m a champion sleeper on planes (as any of you who have ever seen me pre-pushback, comatose, mouth agape, and a tiny glistening pearl of drool perched majestically upon my lips) are well aware, at least based on the post flight mocking I get.
But on this particular flight, I was awake. I couldn’t get comfortable in my (there is a Jesus!) upgraded seat. I moved to the back of the plane and claimed a whole row to myself, but was likewise unable to sleep there after my left hip lost all feeling due to the firmness (I met floors in college with more give) of the seats.
After limping my way Sanford and Son style back to my original seat, I finally accepted my insomniac fate and settled with my ancient iPhone to listen to some tunes. Ironically, the Rolling Stones “You Can’t Always Get What You Want” was one of the first songs to play. I did not, however, appreciate said irony at the time.
Once I was able to grab a little disco nap this morning, it put things into a slightly better perspective. Sure, I couldn’t get what I wanted (a nice, long, mouth-breathing sleep in a tube of recirculated air), but maybe I needed those moments of introspection. I mean, otherwise, I wouldn’t have today’s blog post, right?
Likewise, I meet a ton of managers that are frustrated that they can’t always get what they want, usually $1 BIIILLLION Dollars from institutional investors in six months or less, but maybe, if they noodle on it in the dark of night under a (probably) ebola-encrusted airplane blanket, they may figure out how to get what they need.
To help investment managers on this journey, I put together a handy dandy decision tree to help determine whether now is the right time to market to endowments, foundations and pensions, or whether they should take other steps to get the AUM they require.
Should You Be Marketing To Institutional Investors?
But investment managers, take heart, preferably before you start creating a voodoo doll with my face on it. There are plenty of things you can do to still get your Mick Jagger on and try spending some time to get what you need.
Try a different demographic - some of the items above are more specific to institutional investor clients and may not apply to high net worth individuals, family offices and even friends and family.
Talk to institutional investors when you DON’T have a fund to raise - I know you’re probably saying, in the words of Dorothy Parker, “What fresh hell is this?”, but investors can often be more accommodating of meeting requests (and provide some darn fine feedback) when you’re NOT looking for an immediate wire transfer. Asking for a half hour of time with an up-front caveat that you’re not “selling” anything can be a beautiful way to start a client relationship.
Get your ducks in a row - Figure out the nature of your game now so that when you do talk to institutions, you’re bulletproof. That takes time and effort as you perfect your elevator pitch, refine your deck, get the right service providers on board, train up IR staff, etc. Get it right on the front end and it will pay off on the back end.
I know it can be hard to wait to jump into the AUM chase, but if you follow at least some of this advice, I swear you’re likely to get a little more Satisfaction.
I miss Entourage.
To this day, I’m not sure there was much better than watching Ari Gold lose his collective crappola and yell hysterical insults at people. Listening to Ari’s invective was like giving my id a voice. Sure, it was obscene, profane and probably actionable abuse in many cases, but that’s why it was so much better to watchsomeone else spewing that hilarious filth than to let my own inner Ari Goldout to play.
Vulgarity aside, I also enjoyed watching the agent-principal relationship that Ari had with Vincent Chase. Sure, Vinnie ultimately called the shots, but Ari brought moola and industry know-how to the table. It was, despite a brief firing at the end of Season 3 (and the entire “Medellin” disaster), an almost perfectly symbiotic relationship.
In many ways, you see that same principal-agent relationships play out in the investment world (minus the copious swearing). In fact, I content that all investors can be classified as either principals or agents, or as some hybrid blend of the two, and that it’s critical to know which one you’re dealing with at any given time.
If you’re a money manager on the prowl for assets under management, knowing whether you’re interacting with a principal or agent can save you time, energy and headaches. If you’re an investor looking for a new role, understanding and explaining whether you’ll be a leading lady/man or Ari Gold can help manage expectations down the line.
Investors who are principals usually have some traits in common:
- They’re often quicker to invest – usually because there’s not layers upon layers of decision makers behind the scenes. There is no (or a limited) investment committee and there’s usually no consultant or operational due diligence outsourced resource.
- “Principal” investors may choose more innovative or niche-y investment strategies, invest in new trends earlier and generally take more risks.
- However, they are often able to do this because they are investing their own capital and may not have fiduciary duty to anyone other than themselves or a small group of constituents, which means they don’t have to make enormous allocations or worry about headline risk.
- Think high net worth individuals, single family offices, small foundations.
Investors who are agents also have traits in common:
- They usually take longer to invest due to multiple layers of sign-off and decision making.
- You can be pretty sure that every nook and cranny of your fund, firm and investment strategy will be gone over with a fine-toothed comb, because these investors have more headline and client risk. If an agent investor recommends a fund that blows up or fails you’re almost certain to hear about it because they are investing large, either for themselves or on behalf of their external clients.
- Because “agent” investors often move as a herd, you can rest assured that where one goes, there will likely be a sequel. Making it past the gate with one agent can pave the way for others.
- Think institutional investors (whose minutes and meetings are often matters of public record) and investment consultants. FOFs (who generally have to think about attracting clients to ensure their existence) can fall anywhere on the agent-principal spectrum, depending on the organization.
Obviously, there are benefits and drawbacks to working with both agents and principals when it comes to investing. The only real drama comes from not knowing with whom you are dealing and therefore not effectively managing expectations (and resources).
For example, if you’ve got a truly niche-y and innovative strategy that perhaps is a bit untested, presenting it only to agents may pay off, but it will likely be a long slog and you may be stopped out entirely if your strategy can’t handle large allocations. Or if you have a strategy that is more of a new twist on an old tale, Aquaman 2for example, you may find that high net worth individuals aren’t sufficiently wowed by your offering. If you need to get to a quick close, or if you only have limited capacity left before your final close, landing a prime role with an agent may not be possible. But if you’re looking for a large anchor, or if you have enormous capacity and the time to run the agent gauntlet, these investors can provide the bulk of your capital.
And to make matters worse, some agents present as if they were principals, and principals can suddenly bring an agent to what you thought was your fund’s premier. It would be so much easier if there was just a script the industry could stick to, but unfortunately, you just have to try to learn everyone’s role and trust that if there’s some confusion, you can just hug it out in the end.
It’s August. It’s slow. It’s what the Hitchhiker’s Guide to the Galaxy might have referred to as the “long dark teatime of the soul” when it comes to investment industry activity. The conference circuit is dead. Everyone is on vacation. There are practically tumbleweeds rolling through your office.
Yep, it’s about this time of year when you believe that everyone but you sold in May and went away.
And you’ve got the Out of Office emails to prove it.
Sure, you’re still sitting in your office, or you’re on a nice beach trying to be productive while your family cavorts and relaxes, dutifully sending out email requests for meetings, performance updates, introductory information, requests for proposals, whatever. And all you’re getting back from Darryl, John, Hall and Oates is “I am currently traveling with no/limited/sporadic access to emails/phone. If you need immediate assistance, please eff off/contact this random person. I will respond to/continue ignoring your email upon my return.”
So what’s an investment professional to do?
If you’re getting the Out of Office (OOO) treatment these days, try these handy tips for coping:
1) Assume the email you just sent is going into the virtual circular file. It ain’t never gonna be read, answered or otherwise acted upon. Even if the autoreply doesn’t go as far as this particular OOO did to spell things out for you, your chances of getting a timely response are pretty slim. So look at the date the out of office email expires and mark your calendar for one week after that date. On that day, send your email again. Do not forward, do not refer to your prior email. Send a virgin email, to be touched for the very first time, without the guilt and recrimination of a forward. Start fresh. Just like you hope the recipient is doing after a nice, relaxing holiday.
2) In investing, time is money, but it isn’t life. We’re not carrying hearts around in beer coolers, y’all. Whatever you are emailing about, chances are it can probably wait a week (or two) for a response. Even if it doesn’t feel like it to you in a particular moment. If you get an out of office response, DO NOT attempt to hunt the person down like you’re the Terminator of the email world. On a recent vacation, I had more than one recipient of my OOO decide to text me since they couldn’t reach me via email. Needless to say, given the 17-hour time difference, I was none too happy to receive communication from those individuals in the wee hours of my morning respite from work and responsibility. So, before you go to extreme lengths to contact someone who is out of the office, ask yourself how you would feel if you reached them and they were, I don’t know, at a funeral. Would your call or text be worth disturbing that particular occasion? If the answer is “no” then put down your phone and back slowly away. Otherwise the only funeral you may be going to is yours.
3) Try a little patience. Most people I know start going through their missed emails from the top down (most recent dates first), in the off chance something has resolved itself in the intervening days or moments and they can blissfully ignore all related messages. If you emailed early on in someone’s OOO timeline, give the person a few days to get back to you. See also, OOO tip one.
4) For those composing an OOO, go ahead and say you’re not checking emails. Even if you are, there’s bound to be a few you can’t or won’t deal with. Telling people you’re checking emails sporadically or that there’s a “delayed response” gives those receiving your OOO false expectations, and gives them a little more leeway to harass you while you’re grabbing some R&R (or attending a conference, or staycationing…).
5) Even if you don’t get an OOO response, if you don’t get response from someone after a week during this most humid time of the year, give folks the benefit of the doubt. There’s nothing worse than coming back to the office to find a bunch of pissy emails (“I tried you last week but didn’t hear back”) to make someone NOT want to prioritize you.
If you find you’re just too impatient to follow my Out of Office Etiquette, perhaps you need a little OOO time yourself. Economist Juliet Shor found that Americans take less vacation than the average medieval peasant, who worked around 150 days a year. So make a break from your feudal ways and chillax. You can always start stalking folks again after Labor Day.
Thank You Sir May I Have Another?!?
The first time I ever saw Kevin Bacon in a movie was the infamous and hilarious flick “Animal House.” Although he didn’t yet have the appeal of, oh say, Ren McCormick (me-ow!), he did make an impression on me in his fraternity brother days. Perhaps it was his tight-assed, ROTC-inspired declaration of “All Is Well!” during the movie’s climax that got my attention. But, more likely, it was his tighty-whities in the infamous fraternity initiation paddling scene that caught my eye. I couldn’t imagine, even at the ripe old age of 8, that a grown man would allow another man to paddle him. IN HIS UNDERWEAR. And would cheerfully, though admittedly through gritted teeth, ask for another. And another. And another.
But then again, there are a lot of things I don’t understand, even today at the ripe old age of, well, not 8 years old. For example, I don’t understand why another study showing that smaller and younger funds outperform is necessary or the results touted as surprising.
Haven’t large funds been spanked with this data enough by now for us all to cheerfully conclude that smaller, younger funds outperform their older, larger peers?
I guess not, because just two weeks ago yet another entry in the small/young fund cannon made its appearance. On April 26th, Chao Gao and Chengdong Yin (Purdue University) and Tim Haight (Loyola Marymount University), used data from the Lipper TASS and the HFR databases to prove YET AGAIN that good returns come in small and new packages.
Now, as someone who actively supports emerging and diverse (who are often also emerging) managers, I should be happy to see yet another entrant into the verifiable tsunami of studies proving that small and young funds outperform. But really, isn’t it a little bit embarrassing at this point? I mean, it’s not like we don’t have a metric crapton of research that shows small and young funds outperform already, right? But just in case there was ANY doubt left in anyone’s mind at this point, allow me to point you to the studies that may help you reach the well-documented conclusion that, when it comes to emerging managers, all is, in fact, well.
Small & Young Funds Are Killing It – A Non-Exhaustive, But Pretty Damn Complete List of Research
PerTrac studies on emerging managers, 2007-2011
eVestment studies on emerging managers 2012-2014
Mayer & Hoffman paper on emerging managers. May 2006. Also appears in the book “An Investor’s Guide to Hedge Funds”
“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance” Derivatives, Use, Trading and Regulation, February 2007
“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance,”Journal of Investing, vol. 18, no. 1, spring 2009.
“Emerging Managers: Good Buy or Good Bye?” Barclays Capital, 2011.
“Smaller Hedge Fund Managers Outperform: A Study of Nearly 3,000 Equity Long/Short Hedge Funds” AllAboutAlpha.com, February 18, 2013
“Are Investors Better Off with Small Hedge Funds in Times of Crisis?” City University London, July 14, 2015.
“Emerging Hedge Funds Outperform Established Peers” Preqin, July 2017 (multiple other years of studies also available)
“Size, Age and The Performance Life Cycle of Hedge Funds” Gao, Yin, Haight, April 26, 2018.
Want some long-only fund action? I got that, too. How about:
“Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization” Chen, Hong, Huang, Kubik, December 2004
“Liquidity, Investment Style and the Relation Between Fund Size and Fund Performance” Yan, 2008.
“New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods” Blake, Caufield, Ioannidis, Tonks, October 2015.
“On Size Effects in Separate Accounts” Evans, Rohleder, Tenesch, Wilkens, August 2017.
And how about some Private Equity findings?
“Making the Case for First Time Funds” Preqin, November 2016
“Feels Like the First Time” PitchBook, 4Q2017
As I mentioned, this is a decent representative list of studies of small and new funds across the asset management spectrum. It is not exhaustive, mostly because I’m not sure it needs to be. I mean, you can’t really be standing there decked out in your undies asking me to hit you with even more data, right? So, let’s put the kibosh on proving something we should already know and just work to bring home the Bacon by investing in funds of all shapes, sizes, ages and types, not just tried and true established managers.
You know what I miss? David Letterman’s old Top Ten Lists. Hands down, those were my favorite part of late night TV. I know that others have stepped in to try to fill the void. Bill Maher has his “New Rules” and Jimmy Kimmel has the often-entertaining “Mean Tweets” but, to me, David Letterman will always be the original king of the recurring hilarious late night bit.
I mean, who can forget the Top Ten Things That Sound Cool When Said By Snoop Dogg? And the Top Ten Reasons Homer Simpson Should Be President. Or my all-time personal fave: Top Ten California Names.
So in honor of Letterman and out of a wealth of nostalgia that popped up unexpectedly over the weekend, I hereby offer you my own top 10 list…
Top Ten Ways To Alienate A Potential Investor
10. Spend the first 35 minutes of a call or meeting talking about your bio.
9. “I assume you’ve reviewed our pitch book in advance of this call…”
8. Inability to make polite small talk in lieu of laser-like need to focus on your investment product.
7. Interrupting conversations at conferences and/or staring from two feet away until said investor is so uncomfortable they interrupt their own conversation to acknowledge you.
6. Literally not knowing anything about the investor before you approach them.
5. Two words: Wardrobe malfunction (true stories, but better told over adult beverages than in a blog).
4. Ignoring time zones/weekends/holidays when calling.
3. Mansplaining why an investor’s reasoned conclusion is wrong.
2. Lying, and yes, this includes “gilding the lily.”
1. Saying “I’m not going to go through each slide.” And then going through each slide.
As someone who was born, raised, and has spent the majority of my life in the South, one of the things I’m required to love, besides SEC football, is Redneck Humor. From Trae Crowder, Corey Ryan Forrester, Roy Wood Jr., and Drew Morgan today to Ron White and Jeff Foxworthy a decade or so ago, I love poking fun at myself and laughing at my fellow rednecks. I can reliably drive on the backroads of Tennessee and come up with “You may be a redneck” moments every few miles, and my friends and me are up for our own hillbilly kudos when summer reliably finds us in a backyard with a baby pool and some PBR.
I even have a personal favorite “you may be a redneck joke” that makes me laugh every time I tell it:
“You may be a redneck if you think a tornado and a divorce have a lot in common – ‘cos either way, someone’s losing their trailer.”
A recent trip to the WellRED comedy show in Nashville got me thinking about all the ways in which, I as a redneck, can be defined. It also got me thinking about how we categorize and group other people, places and things in an attempt to make cosmos out of chaos.
There are few places in the investment world where there is more confusion than in the world of emerging managers. Ask two people what constitutes an emerging manager and you’re likely to get two completely different answers. Is it small funds? How small? Is it diverse funds? Ownership or fund management? Is it new funds? What’s the cut off? Does the manager need to be local? Does the manager need to be certified? What counts as a minority? Frankly, I find that emerging managers swirl in their own vortex of uncertainty.
So to help everyone out a little bit, I thought I’d use my 11+ years in the emerging and diverse manager space to create a handy-dandy checklist to determine whether or not a fund may be emerging. After all, it seemed like a great project for a winter weekend when 0.5 inches of snow has me pinned inside the house like the Southerner I am.
You Might Be An Emerging Manager If…
…you have less than $2 billion in AUM and manage long-only assets. Although this may seem reasonable on the surface, since the largest long-only fund managers may control trillions of dollars (with a “T”), it may still be a little large. In an August 2017 study by Richard B. Evans, Martin Rohleder, Hendrik Tentesch, and Marco Wilkens looked at 3,370 separate accounts (“SMAs”) managing $3,671 million and found those in the 10th percentile managed $5.38m, the 50th percentile managed $128m and the 90th percentile managed $1,470m, with a range of accounts from 3 to 15 to 305, respectively. In line with research about mutual funds, the authors found better performance in the smaller SMAs, in part due to liquidity constraints and market impact costs, but also due to increasing management complexity as the number of accounts increased. Take a look at the research if you’ve not seen it yet.
…you have less than $1 billion, and really more like <$250 million, in hedged AUM. (There are only about 700 funds with over $1 billion, so if you’ve gotten to that milestone, beating out 9,300 of your peers, I’d say you’d emerged).
…your firm is owned at least 51% by women or minorities for official certification, or has 33% women or minority ownership if you want to get a bigger crop of funds from groups that historically have had less assets with which to launch funds, and therefore may have partnered with firms or individuals that dilute the ownership structure.
…your fund is managed by women or minorities. This can be key for investors who are looking for cognitive and behavioral alpha (or differentiated networks for private asset funds), and may be more important to some than ownership status.
…the minority ownership or fund management in question is done by a U.S. citizen.
…the minority ownership is not by fungible personnel who were given ownership status simply to qualify for MBWE status (wives, daughters, back office personnel, figureheads).
…the fund is less than three years old or is a Fund I, II or III.
…the fund is not part of a mega asset management complex.
…the fund meets the above requirements and is located in the same state as the certain potential investors (Illinois, Pennsylvania, etc.)
…the fund is owned by veterans or disabled veterans.
Now, obviously there are all kinds of competing definitions out there, and there are also practical implications for investors, particularly larger ones. For example, if an institution manages billions of dollars (with a “B”), it may be difficult for them to look at the smaller end of the spectrum of emerging funds without having to assemble a massive portfolio of managers. Still, I hope these definitions may resonate with folks out there who are looking to capture some structural, cognitive and behavioral alpha. They may be a more successful investor if….
Sources: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933546 Preqin, SBA
NB - I have nothing against crypto and quant funds, honestly, but a little variety is always nice.
It seems as if everyone has been pretty focused on Tweets, hashtags, and the general dumbing down and coarsening of communication of late. So I thought this week I'd inject a little culture into my investment blog. What if investors and fund managers could only think or talk in Haiku? The sentiments would likely remain the same, but the delivery might be much more civilized. So here you go: investor and manager haikus. Feel free to add your own in the comments section.
Seasons change, my phone
Keeps ringing. The same number
Calls. Persistent funds.
Not the best idea
To use diligence checklist
On the kids’ playdates.
Must I disclose this
Doughnut to compliance or
Can I eat it all?
Can’t wait to discuss
Fees with the trustees at our
Next board meeting. Yay.
I don’t want to shake
Hands while grabbing paper towels
In the bathroom. Gross.
Fall becomes Winter,
And I find myself stuck in
Performance is great!
This sector is hot! So why
Don’t people subscribe?
Do you want info
On my investment fund? No?
High net worth peeps, endowments.
Lather, Rinse, repeat.
It’s our process and people!
Oh. You’ve heard that one.
I seem to provide this information to newer and smaller funds often, so I thought I'd cut down on repetition and provide all you gorgeous small, new, and diverse fund managers with a short guide to early stage investors. Now start smiling and dialing!
State Plans To Prioritize
Arizona - Has made at least one investment in a large 'emerging' manager.
Arkansas - Teachers Retirement System reportedly tabled the program in 2008 but 2011 document shows active investments in MWBE managers.
California - Looks for EM's based on size and tenure but prohibited by Prop 209 from looking at minority status or gender.
Colorado - Colorado PERA added an "external manager portal" in 2016 to make "it easier for us to include appropriate emerging managers when the right investment opportunities develop."
Connecticut - Based on size, minority status or gender. Awarded mandate in 2014 to Grosvenor, Morgan Stanley and Appomattox.
Florida - Looks at emerging managers on equal footing with other managers.
Georgia - Invest Georgia has $100 million to work with venture capital and private equity firms in the state. There is an emphasis on emerging managers and emerging funds per press reports.
Illinois - Perhaps the most active emerging manager state, based on gender, minority status and location.
Indiana - Based on size, minority status, or gender.
Kentucky - Reported $75 million allocation at one time.
Maine - Has made at least one investment in a large 'emerging' manager.
Maryland - Very active jurisdiction with details available online for gender and minority status manager information.
Massachusetts- Includes size, minority status or gender.
Michigan - $300 million program.
Missouri - Status based on size.
Minnesota - Past investments in emerging managers.
New Jersey - Status based on size.
New York - Status based on size, minority status or gender. $1 billion mandate in 2014. $200 million seed mandate in 2014.
North Carolina - Status based on size and HUB (minority and women owned) status.
Ohio - Status based on size, minority status or gender.
Oregon - Emerging manager program in place.
Pennsylvania - Status based on size with preference for minority or women run funds.
Rhode Island - Plan in place from 1995.
South Carolina - Status based on size.
Texas - Actively engaged with emerging managers. Status based on size, minority status or gender.
Virginia - Status based on size, minority status or gender.
Washington - Has issued prior emerging manager RFPs.
Oh, and if you reproduce this list, be sure to cite MJ Alts. Thanks y'all!
Seed Programs to Explore
Music to Groove To While Dialing for Dollars
Anyone who has spent any time talking to me or reading my blogs knows I love a good movie. Although I don’t see as many as I’d like these days, I love how a film can transport you, inspire you, create emotion and just generally entertain. I even use the love of a particular film as a kind of odd litmus test in friendship, business and dating situations. Did you adore Forrest Gump? Yeah, that makes me seriously question your judgment.
But some movies stand out more than others in the MJ Pantheon of Favorite Flicks. Star Wars (the original trilogy, natch), Shawshank Redemption, Argo, Bridesmaids, The Blind Side (don’t judge me), The Wolf of Wall Street, The Princess Bride, 50/50, Raiders of the Lost Ark, Rudy, Love Actually, Aliens, The Terminator (1 & 2), Die Hard and Pride & Prejudice (the 2005 version) are just a few of my all-time faves.
And of course, there’s Bull Durham. Though I’m not a huge fan of baseball (too slow, lots of spitting, often hot), I loved that movie when I first saw it at the ripe old age of 18. It was my first sophisticated on-screen romance, which had theretofore been populated by teen sex films (e.g. Porky’s), John Hughes offerings (Pretty in Pink, Sixteen Candles) and saccharine Disney scripts.
When Kevin Costner’s Crash Davis gave his epic speech during Annie Savoy’s, ahem “tryout” between Crash and Nuke LaLoosh (Tim Robbins), Susan Sarandon wasn’t the only one who sighed “Oh my…”
In case you haven’t seen Bull Durham since it’s original 1988 release (sacrilege!), here’s the scene in question. (And you may not remember this, but it is officially NSFW.)
Since we’re nearing the end of summer, I decided to watch my one and only cinematic homage to baseball over the long Labor Day weekend. It got me thinking about what I believe in when it comes to life and investing, and it wasn’t long before I was on an epic, Crash Davis-esque rant.
“I believe in manager skill. That checkbox due diligence only works if you also have a high EQ for evaluating people. That generalists and specialists should work together to combine the best aspects of myopia and a more holistic, 30,000-foot view. I believe that people who call themselves long-term investors, but who regularly redeem in less than 24 months, are full of crap. I believe that managers who say they can’t find diverse job candidates either exist in ridiculously insulated bubbles or have no imagination. I believe that having less than 10% of hedge funds, mutual funds, venture capital and private equity funds managed by women – who comprise 50% of the population – means we’re missing out on some amazing talent. I believe if all investment managers and all investors agreed to always interview a diverse candidate for jobs/fund searches, it would go a long way towards adding cognitive and behavioral diversity to the industry.
“I believe in downside deviation, maximum drawdowns and time to recovery. I think standard deviation is silly. I believe most investors don’t worry about upside volatility, but that out-of-character positive returns should trigger a monitoring phone call as fast as a losing month. I believe in macro funds, commodity trading advisors and short selling strategies, and that investors should consider these strategies before the proverbial shit hits the investing fan. I think hedging with index options isn’t real hedging, and that taking 8 to 12 months to complete due diligence is like wanting to get pregnant without risking actual sex.
“I think investment conferences should improve the quality of their cocktail party wine. That you should NEVER order the vegetarian option for lunch at an event unless you have a desire to eat something that looks like road kill. I believe in polite but persistent marketing. I think that if you focus on your expertise instead of a sale, you’ll amass greater assets under management (AUM). I believe you should always check time zones before calling a prospect or client, and that texting is NSFP (Not Suitable For Prospects).
“I believe in differentiated networks, niche strategies and cognitive alpha. I believe in gut feelings and spidey senses about people, markets, and investments. I believe in contrarians, and in sticking to your investment guns, as long as you periodically re-visit your thesis to ensure you’re not just stubborn. I believe going to cash takes testicular fortitude. I believe getting back into the market does, too. I believe in good business cards, firm handshakes and not approaching prospects in the bathroom.
“I believe that those funds that don’t get into responsible investing/ESG now will be licking AUM wounds in years to come. I believe that all investment managers make mistakes, and that admitting mistakes and ensuring that they don’t happen again is a mark in a manager’s favor. I believe in strategy continuity, but not necessarily in strategy drift. And that past performance isn’t indicative of future results, but it beats knowing nothing about how strategy translates into returns.
"I believe that most meetings could be emails, and those that cannot should be limited to one hour, tops. Oh, and any meeting that goes longer than one hour should involve snacks.
"Finally, I believe in small funds. New funds. Large funds. Old funds. Women run funds. Minority run funds. White guy run funds. Bread and butter funds. Niche funds. Liquid funds. Illiquid funds. And contrarian funds. I believe there is manager talent and fund utility in all types of funds, and that only by looking at the full menu can investor's hope to have a balanced portfolio meal."
So get back to work all. I hope you enjoyed my little investment rant…pith in the wind if you will. Maybe it will get you thinking about YOUR investment beliefs as we ramp back up into what I think could be a certifiably crazy fall market. Oh, and if you have an investment belief or rant of your own (or a good movie suggestions), feel free to sound off in the comments below.
The summer can be a magical time. Whether you’ve spent the past couple of months hanging out with family, taking a much needed vacation or getting sucked into the daily political dumpster fire in the U.S., most folks spend all of August (and most of July) focused on more leisurely pursuits. In the investment industry, not a lot gets done this time of year to be honest. But in just a few short weeks, watch out! The conference calendar will kick into overdrive, investors will start planning end of the year allocations (and redemptions) and you’ll need to jump back into capital raising and investor relations with both feet.
To help you make the switch from porch swings and gin and tonics to panel discussions and bad chardonnay, I’ve enlisted the help of Emoji MJ to give you your “back to school” checklist. Be sure you pay attention, class…Emoji MJ may be taller, thinner and have tamer hair than I (aside: Emoji MJ is clearly French), but I’ve still heard she can be a real beeyotch.
1) The first thing you need to assess is whether you have the right staff in place for your marketing and investor relations efforts. If you're a smaller fund, you may be pulling double duty as both portfolio manager and the marketing staff, but even then, you should take time to think about whether that's the best use of your time and, frankly, whether you're any good at raising assets. If you do have internal or external help, make sure they are a good fit for your firm and have great connections with potential investors. If you're wondering what questions you should ask, check out my blog on The Vicky Mendoza Line And Fund Marketers.
2) Your next order of business will be to compile an investor hit list. This means taking a hard look at who your best prospects may be. This does not mean creating a wish list of investors that could write you an enormous check so you don't have to think about capital raising again. If you're sub $100 million, that likely means thinking about how you can meet additional HNW individuals and family offices and maybe a MoM (Manager of Managers/Fund of Funds) or two. If you're in the big league, your prospecting will obviously look a little different. For those of you who need a refresher on this particular step, please revisit this blog on Targeting Potential Investors.
3) The third item on your "back to school" prep list is to revisit your pitch book. Make sure it works for you, whether you're walking an investor through it, sending it in advance or leaving it as a follow up. Your pitch book is really an extension of you, so make sure it is as compelling and complete as possible, without overloading unsuspecting prospects with superfluous (or uninspiring) information. If you need pointers on building the perfect pitch book, please check out The Ten Commandments for Pitch Book Salvation AND The Seven Deadly Sins of Pitch Books.
4) Got your pitch book nailed down? Good! Now practice how you're going to convey all that juicy info into one 5 minute elevator pitch. That's right...no investor, no matter how charming you are as a fund manager, is going to let you blather on to them endlessly at a cocktail party or during a conference break about your overall awesomeness, so now is the perfect time to perfect your pick-up lines. If you haven't given this much thought, or if your existing pitch isn't getting you to second base (actual non-conference contact with an investor), then take a moment to review these Seven Secrets to a Successful Elevator Pitch.
5) While you're doing a little pre-season homework, it's probably a great time to refresh your monthly letter and tear sheet. Do you know how many times I get just a nekkid monthly (or quarterly) performance number plus YTD performance in a bland email? It's not optimal. So review the proper Anatomy of a Tear Sheet as well as these Five Tips For Great Monthly Letters.
6) Conference season is about to go nuts. So in addition to picking up a gallon of hand sanitizer and some Tums (rubber chicken doesn't always digest well - and don't get me started on the vegetarian options at most events - WHAT ARE THOSE THINGS?!), you'll need to have a strategy. What conferences will you attend? How much can you spend? Speaking, sponsoring or showing up? You'll want to strategize to make the most of the time and effort you spend away from the office. To help you, check out these Conference Dos and Don'ts.
7) After you meet a ton of new investor prospects at conferences this fall, wow them with your elevator pitch, performance and pitch book, and send a few outstanding monthly letters, you'll need a plan for how you'll stay in touch with them going forward. I mean, as much as a fund manager would love it if an investor "put out" on the third date, in these due diligence times, that's pretty darn unlikely. So how do keep communicating without driving anyone batcrap crazy? Try these tips for Staying in Contact With Investors.
So good luck students! Emoji MJ and I hope you make the dean's list of capital raising this fall!
As many of you may have read in my last blog, I spent about six weeks of 2016 delving into the sometimes-smarmy world of online dating. One of the first lessons I learned, besides the liberal use of the “block” function, was that a picture of a potential match was not just a nice to have, but also a necessity.
(BTW, I swear to you all, this is the last time I will mention my horrifyingly brief online dating experiences. It’s not my fault that recent events have spawned a few Match.com flashbacks.)
You see, much of the descriptive language available to would-be daters is fairly subjective. Words like “Average” “A few extra pounds” and even “Athletic and Toned” mean different things to different people. Hell, even descriptive statistics that shouldn’t have been subjective were sometimes unpredictable. I mean, 37 years old means 37 years old, right? Yeah, unless it means 45, 47, or 50.
Before I became online dating savvy (read: scarred for life), I would sometimes have email conversations and agree to meet these faceless souls. I quickly learned that “Average” meant “A Few Extra Pounds.” “A Few Extra Pounds” heralded someone the size of my living room sofa. “Athletic and Toned” meant “Once Did A 5k.” “Salt and Pepper” translated to “Gray” and sometimes “Bald.” And “No Kids” could mean “No Kids,” “Some Kids” or “I’ve Been On Jerry Springer About My Kids.”
So you see, pictures of potential suitors could be helpful. They weren’t definitive – sometimes a picture was taken AT 37 and still utilized eight or more years later – but they were at least sometimes directionally correct.
Sadly, my professional life isn’t so different.
I spend a tremendous amount of time meeting with fund managers. Most of these managers are shiny and new, fresh-faced and full of faith that their first $100 million allocation is mere months away. They are the would-be suitors of the investment world, and they are here to get a first, second, and the all-important third date (bow chicka wow wow) with your capital.
Unfortunately, many of them are lacking the investment industry equivalent of a profile picture: Performance. Instead, they are asking potential investors to take it on faith that performance will be as described in their oh-so-earnest pitch books.
Only problem is, most investors have been on so many dates with fund managers at this point that they’re just a little bit dead inside. Faith isn’t on the menu, while skepticism is served at an all-you-can-eat due diligence buffet. We all know that past performance is not a guarantee of future results, just like a dating profile picture is no guarantee of recognizability in a bar, but at least it gives you some characteristics to look for.
So how do you solve a problem like performance?
1) Predecessor Performance – For a pre-launch fund manager, this is the gold standard of pseudo-track record. If you have performance from a prior fund management gig where you managed a decent chunk of change in substantially the same strategy with substantially the same investment team, it can be of tremendous help to investors. If the performance is audited and portable (meaning you’re not prohibited from using it by your former fund complex), so much the better. Again, past performance won’t necessarily be the same as your future results, but this provides at least a small window into how you may perform in different market environments and what type of drawdowns to expect (although my cold, Grinch-like heart says all drawdowns will be exceeded at some point). Make sure the fees are the same (or provide imputed fees in the same structure as the new fund) and that will satisfy some investors. Do know, however, that for every aspect of the prior track record that differs, there will be a credibility discount. Don’t have your former co-portfolio manager at the new fund? That’s an issue. Going from long-only to long-short? How do we know you can short? And so on and so forth...
2) Trade Your Own Account – For those that do not have access to a portable track record for whatever reason, you should start actively trading your strategy. Now. Actually yesterday. With real American dollars. While it is unlikely that the AUM will be similar (which will discount the performance with some investors) and while it will be a shorter track record in (likely) only one market environment, it’s something. It also shows that you believe in the strategy enough to stake your own financial future on it. Frankly, even if you have a portable track record, creating live performance ASAP makes some sense.
3) Paper Portfolios or Backtests – This is obviously not optimal. In my (too frequently offered) opinion, paper portfolios are only appropriate if you trade a strategy where need substantial AUM to proceed (for ISDAs, etc.). Otherwise, you’re just announcing that you’re not willing to put your own skin in the game. And backtests can be gamed in any number of ways. After all, it’s always easier to plot a course if you know where you’re going to end up. Of course, there are very few investors who will allocate based on backtested or paper portfolio performance alone, but if it’s the best you’ve got, then it is what it is.
I eventually set my online dating search criteria to “photos only.” That saved me a few headaches, although who knows if I missed “twue love” by avoiding as many frogs as possible. To minimize your chances of getting blocked completely by investors, and to maximize your chances of marrying your investment strategy with some AUM, try to proactively solve for performance sooner rather than later. Ideally, you’ll want to negotiate for your track record when leaving your prior firm, but if that’s not possible, do whatever you need to post returns. After all, a VAMI chart can be worth 1,000 words.