- January 20, 2020
- Posted by: Vincent Sarullo
- Category: Fund Administration, Hedge Funds, Raising Capital
In a world with thousands of hedge funds all chasing the same capital with relatively the same returns, there are ways to get an “edge” in learning how to raise capital for a hedge fund.
It is becoming more difficult, complex, and expensive for funds to grow AUM, and exponentially more for funds without industry brand awareness. Marketing and fundraising are two critical aspects of operating a successful hedge fund. Both functions are distinct from one another, yet they exhibit much correlation. Proficiency in them is important to the survival of a hedge fund. Below Tower looks at twenty tips on how to raise capital for a hedge fund.
Commonly fund managers launch their business with friends and family capital. As wonderful as it is to have the support of loved ones, according to industry data, “76.4% of hedge funds ‘tap out’ their network of investors within one year.” Start-up fund managers are often unprepared for the level of thought and resources required to market their funds effectively. Hanging your hat on the story of returns and investment philosophy is no longer the play. Investors want to get under the hood and learn about what makes you tick, who you really are.
The key for fund managers is mapping their strengths and capabilities to the right investor. Managers must create a business environment and culture that will be recognized by the outside world. What do you, as a fund manager, want to stand for? Do you want to be all things to all people? Or fill a very specific niche? It comes down to who you want to be and your plan to achieve that.
Growth in a fund’s assets and client base has a lot to do with effective marketing. Successful funds, as with any business, make marketing a top priority and also understand what it takes to get positive results—a task that is harder than one might think, given the complexity of investment strategies and instruments.
Here are twenty keys Tower Fund Services has found to be effective:
|1.||Tell a compelling story. Great marketers should be able to explain in simple terms what the product does. Capture attention upfront, drop the technical jargon.|
|2.||Hone your messages. We can’t emphasize how important it is to spend the time and resources needed to make complex processes easy to understand. Simple analogies or examples can go a long way.|
|3.||Find your niche. Managers cannot be everything to everybody. Determine your niche, focus your efforts to maximize returns within it, and target your marketing to those who it benefits. Don’t waste time trying to convince a prospective investor that isn’t looking for your strategy that you are a good fit for them.|
|4.||Don’t get mired in the past. People want to invest in future returns, not what was generated in the past. Explain how results will be achieved in the future through the fund’s process and method. This is the true marketing challenge and very often missed.|
|5.||Demonstrate trustworthiness and reliability, then deliver on those with open communication! One way to do this is to announce your short term goals to prospects, over achieve in less time, and repeat. Also, show that the investment and operational processes are strong enough and new business can be taken on without falling over.|
|6.||Be consistent. Even the most memorable marketing presentation can fall flat if clients or prospects are hearing different messages from different people in the firm. Make sure that what you are verbally telling them jives with your materials.|
|7.||Value conversation over collateral. Everyone asks for the whole set of marketing materials (pitch books, one pagers, etc.) for their files but it’s much more important to have the face-to- face dialogue. Here you can really gauge if this is the right situation for you. Does your fund make sense for the person at the other end of the table?|
|8.||Work hard. Mangers need to get their hands dirty. The “build it and they will come” view does not happen, ever. Investors don’t know you exist unless to get out there and let them know you are there. Use your network of friends and family to bring new prospects to the table.|
|9.||Don’t underestimate yourself. Even in an industry that tends to attract people with “big personalities”, managers tend to not have confidence in their ability to sell themselves and their fund. Investors are looking for quality managers and really do want to hear from you.|
|10.||Know what value you bring and who is your best audience. The most important question managers can ask themselves, before pitching their fund, is “What is this investor’s goal and can I help them?” Investors can deploy capital for a variety of reasons; income, capital appreciation, capital preservation, risk mitigation, inflation protection, to name some. Does your strategy fit their objectives?|
|11.||Have sound operations. Emerging managers are attractive for seed investors and family offices given that they have the proper infrastructure and business plan in place. These investors see an emerging manager as a highly motivated entrepreneur who can make nimble decisions. These managers can make investments which may not be possible or not as impactful for large funds.|
|12.||Set small short term and big long term goals. Make sure your daily efforts are in line with achieve them|
|13.||Have a presence on the web. A simple “splash” page that has your contact information is a good start. One of the first things that we do today when we meet a new person or business is jump on the Internet and see what we can learn about them. Since the Securities and Exchange Commission (“SEC”) lifted the ban on advertising, you can use your website to let people know who you are and what you do.|
|14.||Spend at least an hour a day on marketing. A true test in your funds success will lie in marketing activities. Raising capital should be a non-stop, full-time process, which requires devoting patience, time and commitment into crafting comprehensive marketing strategies.|
|15.||Build a quality LinkedIn profile. A professional looking LinkedIn profile can do a lot of good. It allows prospective investors to put a face to your name and see your qualifications, skills and recommendations from others in the industry.|
|16.||Create a logo. Don’t try to “do it yourself” consult a graphic designer to create professional looking, sleek materials. You can use a site like www.logotournament.com and for as little as $250, you can set up a competition in which graphic artists from all over the world will submit designs for you to select as your company logo. The website has some simple questions to answer about the industry you work in, colors you like etc. Based on that simple profile, the artists will create and post their drafts for comments. After a few weeks, you finalize your selection and the winning artist sends you the logo in all the file formats you need for printing business cards and stationery, and for use on a website.|
|17.||Use the cloud. Easily share and access your information electronically. In addition, save money, time and the environment by using less paper.|
|18.||Focus on building your network. New managers come to market with their own capital plus the “friends and family plan” base of investors. All too often, they forget that people in this core group of investors have their own network of friends and family. Expand your circle of influence by leveraging your existing relationships. Maintaining open lines of communication with these investors, especially when you are knocking it out of the park with your returns, will keep them engaged.|
|19.||Create an “online dating profile.” These well-vetted sites connect interested managers and investors together. Take advantage of these “matchmaking sites.”|
|20.||Hit the road. Visit your investors and prospects in person. Trust us, they want to see you!|
About Tower Fund Services
Tower Fund Services is a third-party administrator offering a full spectrum of tailored outsourced solutions for hedge funds, funds of funds, separate managed accounts, multi-manager platforms, private equity, venture capital, tax lien, and real estate funds. Its suite of services includes fund startup consulting, accounting, compliance, NAV calculations, investor reporting, and tax services to alternative investment managers in all strategies and structures.
This article was originally published on August 3rd 2016 and updated on February 13th 2017.