By George Alexander*
There are number of ways to deploy resources for marketing in a new hedge fund. Here experienced hedge fund COO George Alexander explains some of his decision making in using in-house marketing capability and some of the options to out-source getting to the right investors.
We have only one marketing executive, and it is a big world to market to. So we have decided to use a third-party marketer (3PM) to help us. They may have a modest retainer, but that aside it only costs us if we raise capital, and it adds bandwidth to our capital raising effort. We think using a 3PM should increase the probability of us reaching out capital milestones. This is partly because the external marketers effectively prise open the door for their hedge fund clients by working their own networks, but also because all 3PMs have to do their own due diligence. To the extent that the 3PM is rated by investors in hedge funds, the funds the 3PM chooses to work with are accredited a hygiene factor, and maybe some credibility.
At the same time we are keen that utilising a 3PM does not act as a substitute for a marketing strategy. Our CIO in his previous role had employed what many people would consider a full marketing team in advance of raising a lot of capital. So he probably has a more constructive take on marketing expense than most new hedge fund CIOs. Maybe that is why he sanctioned the spending on a dedicated hedge fund CRM (Client Relationship Management system), which again reflects taking marketing and client servicing seriously. The cost of a hedge fund CRM is upwards of $5,000 per user per year. A good CRM should allow you to weigh your best prospects appropriately and help you target your resources.
We have also engaged a lead-generator company. The way they operate is to contact investors by phone and ask them what strategies they are currently interested in. They have given us two leads a week. We reckon the cost of that service is about a third of the cost of hiring a senior marketer for a year, and you don’t have the ongoing commitment.
The marketing strategy should be aligned with the fund structure. So there is a marketing implication in having a UCITS structure or a single country designation like the French QIF. We have a UCITS structure ourselves, but are looking to add a Delaware feeder to it. That is because we have targeted some US investors that one of our staff has connections with.
My final investor-related point is on fund terms. A new investment management company represents a higher risk to an investor than an established one. So it is appropriate to reflect that higher risk for investors in lower initial fees. In our case our first wave of investors paid 1/2 % management fee. The next wave of investors paid 3/4 % management fee, and later investors will pay 1 1/4%. Also smaller funds have a higher TER and this fee scale offsets that.
This is not just about the medium – it is also about the quality of the message. As a new hedge fund manager you need to know how to reflect your investment process to investors. You have to give potential investors a story – tell them that you see the world in a slightly different way from their existing managers. That will add credibility to telling them that you aim to deliver a different return stream for them. The investment process has to be interesting in the telling and repeatable. You have to be able to articulate your process once you are in front of investors.
*This is an edited extract from the book “Successfully Launching A Hedge Fund in Europe” published in March 2017. George Alexander is a pseudonym for an experienced hedge fund Chief Operating Officer based in London. In that book he also has sections titled “Given the cost and effort, consider should you even bother with the project?”, “System Selection Experience”, and “Service Provider Experience”.