One of the hardest things to achieve is to be groundbreaking. Yet groundbreaking is what it takes to succeed today in the hedge fund industry. The competition is so fierce for both money and investment resources that only an exceptional few have a legitimate chance of making the leap from supporting cast member to headliner.
There are new rules in formation not only as regards the regulatory landscape, which will affect most hedge funds and investors, but also concerning operational issues, which will impact corporate governance of funds both large and small. Reflecting on perspectives from the past leads to some notable observations about the future of the hedge fund industry’s business development.
“No man is an island, entire of itself; every man is a piece of the continent, a part of the main.” —John Donne
Being an investment star is not enough in itself. Today’s investors demand a complete organization to ensure that they aren’t signing on with a star whose light might diminish and leave them in the dark, so to speak. It takes a concerted effort and a cast of excellence to create the next generation of hedge fund talent. In short, it takes a village to elevate a unique idea to an established presence.
“The mass of men lead quiet lives of desperation.” —Henry David Thoreau
Replace the word “men” in the quote above with “hedge funds” and you will be closer to the truth in today’s alternative environment. Most of the 8,000 or so hedge funds in existence today are in some stage of desperation—either from an inability to raise capital, achieve stated performance goals, or afford the level of talent necessary to propel the business to the next level.
Accepting that a collaborative effort is required to succeed represents a shift from the traditional perspective of singular stars rising through the ranks of the hedge fund world on the strength of investment results. No one will argue against the merits of performance excellence being a top consideration for success, but the pendulum on weighting performance versus sustainable business practices has swung far in the opposite direction.
With a choice between two fund options: one with 15% annual returns, a jerry-rigged infrastructure, and spotty investor relations versus a second with 10% annual returns, a robust operational structure, and regular, meaningful investor communications, an institutional investor will tend to the latter in seeking a long-term partnership with success.
“No one can whistle a symphony. It takes a whole orchestra to play it.” —H.E. Luccock
In reviewing the basics of breaking through from concept to company, let’s begin with the spark. Hedge fund managers express themselves through market mastery. Much like a painter, an elite athlete, or a concert violinist, the market master expresses artistry within his chosen medium of the investment space. The genesis of every successful fund is this creative push. If there’s not something new to bring to the party, why attend at all?
If a manager is indeed successful in identifying this spark, he must then be iconoclastic to achieve this breakthrough approach. Not only must there be a verifiable uniqueness to the fledging strategy, but it must be able to have its sustainable investment brilliance be cultivated.
“It is the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed.” —Charles Darwin
The idea generation and trade execution of the approach must be robust, showing true legs in terms of future market opportunities beyond the current market situation, whether in single-sector, multi-sector, or some other segment. It also must be able to be articulated to the investor community in order to attract attention to its potential for growth.
A new fund must showcase an investment approach that has the ability to become distinct, occupying a unique space in the investment field. This is deceptively simple to state, but extremely difficult to establish.
“Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to attain uncommon results.” —Andrew Carnegie
Next, there must be a nurturing process to encourage the patronage and development of this new approach. Seeders, early-stage investors, strategic service providers, and core critical fund talent are required to coalesce around a concerted effort to create growth opportunities for the new fund.
Developing a healthy dynamic and balance of these constituents is one of the hardest challenges within the early months of a new enterprise, but critical to the long-term successful evolution from start-up to established business.
“Coming together is a beginning, staying together is progress, and working together is success.” —Henry Ford
Finding the right partners for start-up growth is as important as securing additional investment talent for a new fund, but often is addressed as a second priority.
The funding process has to be driven by the manager, but in many cases, this process is where managers find themselves unable to make the right connections. Consequently, they try to forge ahead with limited capital and a bootstrap approach, only to ultimately fail.
“Gettin’ good players is easy. Gettin’ ‘em to play together is the hard part.” —Casey Stengel
For the fortunate ones who are able to secure financing, they must identify and partner with the right combination of in-house and outsourced resources. As the fund evolves, this balance will flex and grow to reflect the changing needs of both the fund and its investor base.
Reporting analytics, service providers, research generation, and a range of other issues will dictate where and how the fund adds to its staff or adds to its provider base.
Gone are the days where a “smart” fund can get away with massive spreadsheet-driven modeling and reporting that is arcane and managed by one or two investment analysts who become the guardians of the fund’s strategy execution.
“If everyone is moving forward together, then success takes care of itself.” —Henry Ford
The industry has responded admirably to this evolution away from internal one-off structures to include a wide range of specialized and state of the art services for funds from inception through maturity.
Over time, each fund must define its optimal mix of support that meets its needs and its budget, and revisit according to its growth path. It is a happy problem for a manager to address when the business has the ability to bring in-house some of the functions critical to the on-going growth of the business, and has acquired the financial means to do so.
Also on the management radar is the pressing need to comply with evolving standards, some of which will be mandatory, based on fund size or investor base, and some of which will be necessary from a competitive stance.
Investors are requiring that all of their investment options pass stringent compliance testing on a host of factors, both legal and operational. Regardless of whether or not a fund has formerly registered with the appropriate agencies from a legal standpoint, it must pass this investor scrutiny to meet today’s allocation standards.
Fund managers who are serious about building their business should consider joining the larger community in a number of ways. These might include engaging with trade associations, becoming an expert resource to promulgate information and trends to the investment audience, and forming a networking process that supports the fund’s objectives for positioning and growth.
“The secret is to gang up on the problem, rather than each other.” —Thomas Stallkamp
Building a hedge fund has always been a job for only the most fearless. But the added challenges and pressures of the market today have created a barrier only a select few will rise above to join the ranks of elite independent talent. Encourage the entrepreneur who, with dedication and persistence, might grow to be a powerhouse.
Diane Harrison is principal and owner of Panegyric Marketing, a marketing communications firm founded in 2002 and specializing in a wide range of strategy and writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line. She can be reached at dharrison@panegyricmarketing.com or via www.panegyricmarketing.com.
