Are You Clearly Differentiating Your Fund Product?

Each year it grows more challenging for an emerging hedge fund manager to attract investors.

Emerging managers have been hearing for some time a call for transparency and proof of operational risk management. Arms-length administration, recordkeeping and reporting oversight have gone from being “nice to have” to “need to have”. Yet, while these operations-related issues present business management challenges, they are not going to be the key selling points of tomorrow that will differentiate one emerging manager from another. Instead, emerging manager firms are going to be fighting to stand out from one another by communicating about the other key due diligence factors that investment committees discuss behind closed doors: Performance, Pedigree and Process.

Global macro and geopolitical challenges of the past few years — COVID, interest rates, inflation and wars — have made it so there is more than company-specific risk that sophisticated investors want to hear about a money manager’s strategy implementation when they are conducting their due diligence.

For these reasons, educating and persuading people to understand and buy into the Process story of how a manager invests is going to be even more crucial, both for attracting assets to a hedge fund and for keeping them sticky.

So, what can an emerging manager do to see he or she is clearly differentiating the firm’s product from the competition? Reassess the marketing storyline and sales materials to make sure the firm is presenting an explanation about investment process that is both buyer-focused and appropriately detailed.

To help determine whether your firm is doing a good enough job in communicating its Process story in its marketing materials, try to put yourself in the shoes of your prospects and ask yourself these questions:

1) Am I being too vague?

As investment consultants and financial advisers have told emerging managers at industry conferences even before the credit crunch, they do not have the time to perform detailed due diligence on all of the money managers out there. So, the short cut they take is to look first for reasons to reject a manager. What, aside from obvious red flag issues, may qualify as reasons for an emerging manager’s marketing materials to get moved from a prospect’s In Box to the reject pile? Reasons to doubt the efficacy of a manager’s claimed strategy and a commodity-like lack of differentiation from the pack are two leading culprits. Such impressions form when the prospective investor is given too little information to go on. The problem is frequently an emerging manager’s vague sounding explanations about his or her investment process.

Vague sounding explanations about the investment processes behind firms’ strategies are more often the result of poor communications skills rather than because managers are trying to keep confidential a truly proprietary element of their portfolio management. Unfortunately, forgiving and being willing to overlook a manager’s lack of good communications skills is not the first thing that will come to mind for prospective investors when they are presented with unclear explanations about how a manager is running a portfolio.

Make a prospect have to do work to drag out a clear enough understanding from your firm about how you think and invest and you’ll lose the sale.

2) Have I addressed this market environment?

The storylines and marketing materials of many emerging managers lack mention of how they plan to navigate their portfolios through times of market uncertainty (e.g., the aforementioned global macro and geopolitical risk factors). Those that do will help engender comfort factor among prospects and further differentiate themselves from their competition. The money managers who think they can wait until they are asked such questions in, say, a finals presentation, are unlikely to get that far.

3) Could my story get lost in translation?

Further complicating things for the emerging manager is that in almost every case a prospect who is pitched in a sales meeting is going to be retelling what he knows about the manager and the product to others involved in their decision making process. He will be speaking to an investment committee, a spouse, an accountant or to an attorney. And he will be retelling the emerging manager’s story to that person or group. So, one of the important sales missions a fund has is to reduce the odds that a prospect will mess up retelling its story.

Your firm’s marketing materials are what tell its story when the manager is not there and are what a pitched prospect will pass on to colleagues when your firm is under consideration. A clearly written explanation about the investment process and how you think can improve your firm’s odds that it has differentiated itself from its competition and reduce the odds that your prospect will mess up retelling your story to others.

Beyond Performance: The Story You Must Sell

Today, more than ever, success in attracting investors is dependent upon an emerging manager’s firm’s ability to educate and persuade people to be aware of, and buy into, how it invests. Achieving this requires developing a cogent and compelling way to tell the investing story with consistency, applying it to sales marketing efforts and obtaining third-party endorsement for, and increased awareness of, the firm’s investing process.

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© 2024 Frumerman & Nemeth Inc.

Bruce Frumerman is CEO of Frumerman & Nemeth Inc., a 36-year-old financial communications and sales marketing consultancy that helps financial services firms create brand identities for their organizations and develop and implement effective new marketing strategies and programs. Frumerman & Nemeth’s work has helped money management firm clients attract over $7 billion in new assets, yet they are not third-party marketers.

Frumerman & Nemeth is internationally recognized for its work in crafting for clients the beyond-the-numbers story of how they invest — content that investment committees actually discuss, debate and vote on behind closed doors when considering firms on a short list for potential investment. Importantly, this is required due diligence content that cannot be communicated in pitchbook format.

Frumerman & Nemeth’s work also includes providing strategic consulting on product and strategy-specific branding, crafting the required strategy-specific content detail and designing and producing the marketing tools needed to make it through the two-month to two-year institutional selling cycle. Clients also employ Frumerman & Nemeth to help promote the intellectual acumen of management — helping them get speaking opportunities, write and give speeches as panelists or stand-alone speakers at industry conferences, and through media relations marketing services.

Mr. Frumerman can be reached at info@frumerman.com, or by visiting www.frumerman.com.