Last year, we published our 2015 Hedge Fund Predictions. This year, Hedge Funds are joining Private Equity, VC, Real Estate, Liquid Alternatives and everything else that doesn’t fall under traditional long-only stocks and bonds. Our first prediction is that all of these strategies and structures will be described as Alternatives – or even just Alts. Managers want more distinction between these asset classes, but we believe they will become even more grouped together.
The upcoming year is anticipated to be another flat-ish year in equities, with increased volatility. Additionally, there is no commodities re-inflation in sight, nor a big surge for emerging markets. Interest rate rises are greatly anticipated, but will most likely remain subdued, maintaining a highly accommodative environment. With that in mind, asset classes that can prove non-correlation to the broad markets and deliver positive absolute returns (as opposed to relative) will be winners. Alts have been chasing the bull since mid-March 2009. Now is the opportunity to shine.
Those asset classes can jumpstart or greatly enhance their firms if they:
Learn to tell complex stories simply
If you hadn’t already noticed, this was our first prediction for 2015 as well. It fares just as well for the new year, as firms will need to set their positioning, yet nuance their story to wider and segmented audiences. Making sure that investors of all levels of sophistication are able to quickly and easily grasp your differentiation is critical. They must know who you are, what you do, and just as important, why you do it. Those three takeaways are now the price of admission, and should deeply encompass your differentiating factors. E5A saw many firms attempt to hone these points over this year – a few succeeded, more are on track, but still, most aren’t there yet. This is arguably the most crucial element to the success of your marketing. Once it is established, the rest of your outreach program and collateral will flow naturally.
Feature convincing, empirical proof
Track records prove that an investment thesis and process work. They also prove that they are not correlated to “old-fashioned” stocks or bonds, and today, especially ETFs which are eating away at assets and chipping away at fees. Highlighting these facts and differentiators within your marketing materials are certainly ways to attract the interest of prospects. Do not hesitate to highlight your non-correlation with headlines, subject lines, charts, images and raw data. Many consultants and asset owners want to do their own calcs – let them. Note to smaller managers, the fact is that “boring and tedious” funds win larger allocations. Leveraging that you do not share these same characteristics is a double-edged sword. Know your Greeks inside and out and own your positioning to win “right fit” clients.
Understand the difference between marketing and sales
OK, all your salespeople want to be called marketers. Whatever. Embrace modern marketing, every prospect and client touchpoint, outreach programs, collateral, events, and other communications. Set your “marketers” up for success. Put programs in place that allow them to become closers instead of hunters. Hunting is for the marketing department who should reel prospects in, not only for creating awareness, but also for making the positive impressions that highlight why you run your strategy uniquely and successfully. Marketers, get over yourselves and embrace modern marketing. It will make you rich — not obsolete. No one allocates to a fund in a material way solely because of a marketing program — not even one of mine. It takes a partnership of marketing and sales. The sales team is comprised of humans, to close the sale (whoops, I mean the allocation).
Bifurcate major prospect segments
Managers have difficulty serving HNW clients and institutions. The fact is, rich people want big returns for their 2&20. Institutions want funds that manage to a risk budget, IRR, volatility benchmark or other how-do-you-fit-into-my-overall-allocation strategies. Draw a line in the sand, and decide who you really are, who you want as clients, and why. We all know in the future that the big flood of new dollars are from retail or advisors. But today, the big tickets are still from institutions, which are not nearly complete “alt-ing” their portfolios. Pick your segment, own it and market, aiming directly to it.
Embrace data targeting
Is there a business that is not obsessed with “big data” these days? Newsflash, it is just as important on the marketing side as it is on the investment side. Once you have decided on your market, segment it. Learn every nuance about each segment. Learn what you need to, in order to master data and targeting. This is business building. Today’s most successful managers are business-owners and know it. They run businesses, not just funds.
Let advanced technology become part of their firm’s DNA
Over the course of 2015, there was a huge flood of incoming technology throughout the industry. The Fintech world has made its mark, and it is only just beginning. From robo advisors, data aggregators, secondary markets, automated deal rooms to optimizing algorithms, 2015 set the stage for 2016, by changing the game on several playing fields. Firms are compelled to embrace technology if they want a competitive advantage. And once implemented, it will be old news. Why? The emerging new year will be one where successful firms regard tech as part of the fabric of their companies. This means factsheet and statement automation, tracking prospect behavior via analytics, and running much of your business from your phone. It is no longer about adding technology to your firm — it’s about trying new advances and mastering the tech for real strategic advantage.
Learn to LOVE compliance
This comes down to the not-so-fuzzy issue called trust. You see, compliance isn’t all about you, or clients avoiding fraud or meltdowns, or appeasing the media. It is about building trust across asset owners, consultants and the entire ecosystem. With all of the bellyaching, it really isn’t that hard to adhere to the highest standards of the land. Throughout marketing to trade allocations, we all want to be factually accurate, be as transparent as we can (without giving away our secret sauce), while making people happy. Happy clients, even institutions, are more receptive to new products, and increasing existing allocations. So do the hardest, most annoying work first and get it done perfectly, so you don’t have to revisit it. Put processes and automation in place, until you are so overly compliant that you can brag about it. Stop all the whining. Try working at a B-D or big bank, and then you can really complain about regulation.
Additional Thoughts
Fewer Launches, Higher Hurdles
This sucks, but next year, we’ll be seeing fewer launches. The price of admission has gone way up. The amount of AUM required at launch to sustain a real staff, technology and attract the right vendors keeps rising. The select few, new funds will be better pedigreed, which does not make them better, just more viable. Today’s emerging managers who survived the August shakeout, along with an “interesting” fall, have the ability to gain new assets. Leverage and coalesce your interesting stories of how you managed to get through the rough months to succeed.
Make that org chart
To be really allocated, you need a real team and business plan. I remember hiring people I didn’t really need, to gain institutional strength perception. Create the org chart, put it in your presentations, even if there are empty boxes, or boxes that are filled through outsourcing. Start to identify the right people for those boxes. These efforts will pay off with allocations, and with a better run business (I was wrong and needed those people, who helped change my life).
Allocations will find their way to managers who communicate clearly, to the right potential investors (and their consultants), consistently and with quality. It is how my firm (I am a former manager) raised substantial assets, and it is how forward-thinking firms (read: our clients) will as well.