Alternative Investment Management Association Representing the global hedge fund industry
Sophisticated investors know that performance alone is not a good reason to hire a manager. Alternative investment management executives need to understand and embrace that dynamic, and change how they position and market themselves as they work to build successful businesses and long-lasting client relationships.
Regulators and the international legal community have always told financial firms not to rely on performance numbers when marketing themselves. Mandated language—including “past performance is not indicative of future results” in the U.S., and “past performance is not a reliable indicator of future results” in the UK—warns investors of the perils of chasing last quarter’s returns and suggests a better way for funds to accumulate and retain assets.
Although headlines and investor letters are focused primarily on performance numbers, the more sophisticated allocators to hedge funds often take a different approach to vetting managers.
Alternative investment professionals must cater to these sophisticated investors by changing how they position and market themselves. Instead of touting performance numbers, which are a prerequisite for any asset-hungry hedge fund, these firms must emphasize branding and thought leadership.
By building a brand and long-lasting client relationships, hedge funds will be able to achieve something that is far more valuable than last quarter’s performance numbers—a sustainable business.
The dichotomy between short-term performance and long-term success is played out nearly every year in the various hedge fund rankings. In 2013 a Bloomberg Markets comparison of the 10 largest hedge funds in the world versus the 10 top-performing large hedge funds (funds with at least $1 billion in assets) shows no overlap between the biggest and the best. In fact, not a single one of the 10 largest hedge funds in the world for 2013 shows up in the list of the 100 top-performing hedge funds for that same year.
And this is not a new phenomenon. In 2004, during a time of high-profile launches and rapid industry growth, a similar comparison of the billion-dollar-and-higher managers versus the top performers showed no common names between the two lists. (see: “Battle of The Brands,” Walek, AIMA Journal, June 2005).
Looked at in another context, investors have long demonstrated that they place a higher value on strong brands. In a 2012 article in the Journal of Brand Management, Kirk, Ray and Wilson state that “brand valuation estimates are found to be significantly associated with share prices above and beyond book value and earnings information” for public companies who have invested in and developed strong brands.
Companies such as Google and Apple trade at high multiples in large part because they understand the value in having a strong brand. Investors label such companies ‘blue-chip’ and rarely jump off the bandwagon, even if these companies don't meet earnings expectations every quarter. Why should hedge funds be approach investor relations any differently?
A countless number of firms provide money management services, just as dozens of companies manufacture and sell personal computers. Many of them are even good at it. But what separates the giants from the also-ran's is largely wrapped up in their brand.
A new brand environment
Recent events such as the rise of social media, a 24-hour news cycle, the passage of the JOBS Act, increased competition from alternatives and traditional asset management companies, and the proliferation of liquid alternative funds have opened up the alternative investment industry to a wider audience. As a result, hedge funds now face increased scrutiny and even greater opportunity. As investors stop looking at past returns alone for evidence of future performance, hedge funds have no choice but to adapt how they communicate with current and potential customers.
A brand is a name and a market position that stands for something. A brand—communicated by a name, logo, tagline, presentation deck, website, road show, advertising, original content, social media, events and related tools—helps build marketplace awareness and understanding of funds and fund companies.
Hedge funds need to fashion an attractive brand and market position that appeals to existing investors and potential clients. This requires defining the brand’s position in the marketplace and coming up with an integrated communications plan that combines elements of traditional marketing (media interviews and speaking appearances) with elements of new-age marketing (content creation and social media).
Every hedge fund and hedge fund manager stands for something—whether it is effective risk management, an experienced investment team or an alpha-generating strategy. Ideally, a hedge fund would stand for all three. But the majority of funds only stand for one thing—their performance numbers.
The managers of the mega hedge funds can typically survive a down year or two because they’re still earning management fees. But how did they accumulate so many assets in the first place? Part of the answer is performance, yes, but all funds will experience up and down years over a long enough period of time. The larger answer, as noted earlier in the discussion of the value of a brand to stock valuations, is an effective marketing plan.
In today’s environment the most successful hedge funds, and the prolific managers behind them, are all brand names that offer investors a sense of trust and exclusivity. These funds rarely experience significant capital outflows because investors trust the managers to right the ship. That’s the power of smart marketing.
So are hedge funds beginning to embrace the value of a brand? The early signs are yes, although there is still a long way to go.
The first hurdle to building a brand is establishing an online presence. According to a recent WalekPeppercomm study, 96 of the 100 largest hedge funds in the world have a website, including 95% of the largest U.S.-based funds. However, 54% of those U.S. funds have either splash pages or very simple pages with only basic information about the fund.
A digital footprint is an absolute must for any hedge fund in 2014, even the most secretive ones. Investors won’t settle for the bare minimum anymore. They want to see how the fund invests, who the manager is and what the fund stands for.
There is also evidence that many firms are beginning to build their internal marketing teams. According to a study of hiring trends by hedge fund management search firm Glocap and industry research firm Hedge Fund Research, recruiters are actively going after candidates who have experience with “internal-facing roles but are capable of being market or client-facing.”
Other parts of the brand building process include managing a firm’s reputation, being transparent and showing commitment to the market. PR firms are increasingly providing these types of these services. According to rankings compiled by Absolute Return, 45% of the largest hedge funds in the Americas employ a public relations firm, up from 36% in 2012. That number goes up the larger the firm, with 75% of firms with more than $6 billion in assets under management reporting that they work with external representation.
Hedge funds can no longer risk standing by as their competitors—and their investors—define their brand for them. They need to be proactive in establishing a positive identity, one known for not only outperformance of the market but also excellent client service and market expertise. The hedge fund manager that seems to genuinely care about servicing his or her investors and is an industry expert will always beat out the manager that only operates in secrecy, regardless of the merits of their respective investment strategies.
Finally, managers have to address the elephant in the room—the transformative potential of liquid alternatives. As sophisticated investment products become available to an increasingly large customer base, hedge funds will have to rely on similarly sophisticated marketing if they hope to be major players. Institutional and high-net-worth investors may not be very active on Twitter, but the investor of tomorrow most certainly will be.
For most financial professionals performance is still the holy grail of everything they do. But it’s not enough anymore. Increased competition and a 24-hour news cycle is redefining what it means to be a successful hedge fund manager, and brand marketing holds the key.
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