It is a tough time to be in the alternatives business. According to BarclayHedge, the hedge-fund industry saw widespread redemptions in March, totaling some $86 billion. The number is more than ten times the figure for February, which registered about $8 billion, representing more normal ebb-and-flow in the industry. Since the headline figure includes only those 7,100 funds in the BarclayHedge database, we assume the actual amount of global redemptions in March was worse.
Conventional wisdom suggests that hedge funds are buttressing their operations during this period, focusing on eking out performance and retaining existing clients. They are putting external marketing activities on hold. Some would argue that this approach is particularly important for emerging managers who have more limited operating resources at their disposal.
We suggest that nimble players may want to rethink that inward-looking strategy. An argument like “investors have shut down” is nonsensical. Many investors may indeed be at the sideline, but all investors are not. In the details of the BarclayHedge data, event-driven and sector-specific hedge funds have seen inflows.
In our view, hedge-fund managers may be surprised at the latent buoyancy in their capital-raising efforts over the months ahead. We believe the key to success is three-fold:
Recalibrate Expectations. In general, the volume of assets available for hedge funds worldwide is much smaller so your allocation will be necessarily limited. We note, for instance, that some hedge funds have launched over the past month with $10-to-$20 million in assets. Those numbers are modest, but they reflect the truth of the macro setting.
Focus on Documentation. The quality of written material is now more important than ever. Your opportunity must stand on its own, bereft of one-on-one salesmanship. Web conferencing can fill the gap, but managers should adopt a what-you-see-is-what-you-get mentality when it comes to legal and sales material. The pace of the sales cycle is determined by clarity and transparency.
Amplify Desktop Research. Generating qualified leads is difficult work, particularly when raising assets for an intangible product. Making matters worse, proven lead-generating mechanisms, such as industry conferences, are on hold. You should double-down on reading the trade press, looking for trigger events to identify names. Fresh database and news subscriptions can invigorate the sales process.
Emerging hedge-fund managers, in particular, do not have the luxury of putting capital-raising activities on hold. Cutting external efforts now means that those managers will be out-of-the-game in a year, given the extended sales cycle in the hedge-fund industry. For new-to-market players, their already small voice could be terminally-muted, unless they continue to build relationships during the pandemic.
We think it is naïve for hedge-fund managers to pause their relationship activities at this time. Travel budgets, for instance, can be repurposed to support marketing plans; the lull in sales-related buzz can be used to rethink due diligence material. Beyond the headlines, there is a gift of time and money at work for those in the alternatives business. The net impact is the ability to blaze a more profitable sales path than the one charted at the beginning of this year. ■
Our Vantage Point: There is a lasting legacy of the coronavirus outbreak. The hedge-fund industry now has to think in terms of an organic asset-gathering process, rather than a calendar-year sales cycle.
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