Portfolio Risk Management As A Branding Opportunity

Ever since the global financial crisis of 2008, risk management considerations have taken on a significantly higher importance in decision making among those conducting due diligence when evaluating a prospective hedge fund investment.

Hedge fund firm owners have felt the impact. As they have often been told, risk management — as considered by prospective investors — encompasses operational, technology and regulatory risk as well as investment risk. Sophisticated investors, from family offices, endowments and foundations, to institutional plan sponsors and their consultants, expect to receive communications from a hedge fund that presents and explains how each of these risk management categories are addressed.

When you give pause to consider what opportunities you may have to positively impact brand perception, reflect about what you think and do regarding risk management.

While many aspects of the support to identify and mitigate operational, technology and regulatory risk could be fully outsourced, with risk management protocols being created and put in place by outside service providers, the same cannot be said for the category of investment risk management. When it comes to portfolio management, the starting point for that type of risk management is both internal to the firm and subjective. Unlike operational, technology and regulatory risk management, whose protocol features are primarily objective based in the eyes of investors conducting due diligence — and more generically similar among both hedge fund firms and strategies — investment risk management is based upon the personal investment beliefs and opinions of the portfolio managers who created the strategies. Therefore, communications about such information needs much more customization in order to take into account the style and idiosyncrasies at each firm.

Money managers mix and match their ingredients, use different proportions and come up with different end results for the risk management protocols they employ in their work to assemble and manage their basket of holdings. Which investors buy into which investment manager’s recipe for portfolio management and the investment risk management behind it? That’s part of what makes competition in the money management business. A hedge fund’s investment risk management is where one of the biggest opportunities for branding lies.

What steps can management at an emerging manager hedge fund take to improve their ability to mitigate investment risk and then communicate this to prospective investors who are conducting due diligence on the fund?

Branding — what to say, and where
In decades past, a surprising number of hedge fund managers thought they could get away with simply claiming they had an investment process and then a ‘risk management overlay’ for monitoring their portfolio. This communicated that portfolio risk management was an afterthought rather than a core element that existed throughout the investment methodology. That doesn’t suffice anymore. As we’ve heard prospective investors complain when hearing such an explanation, “That only tells me they alert themselves once the horses are out of the barn, and that’s not good enough.”

Frumerman & Nemeth advises its hedge fund clients that there are four key areas within their investment process storyline where they need to communicate how they handle portfolio risk management: research and security selection, asset allocation-based decision making (including position risk-sizing), trade execution, and portfolio monitoring.

A hedge fund portfolio manager or salesperson needs to be prepared to both talk a prospect through investment risk management at the initial in-person sales presentation and leave it with him or her in printed form.

A hedge fund’s portfolio management approach to risk is not something that can simply be recited verbally at a single meeting with a prospect. By the time that prospect meets with fellow investment committee members to discuss the possibility of investing with the hedge fund enough time has passed that the likelihood of the prospect remembering enough vital detail to share with his or her fellow decision makers is extremely low. Conversely, the likelihood of the prospect messing up re-telling the hedge fund’s risk management investment process story is extremely high. That’s why this content also needs to be delivered in written form.

Since this risk management strategy explanation is text based — content that goes beyond a bullet point or two — a flip chart pitchbook is the wrong marketing document to rely on for getting this information across. While it is the perfect tool for communicating data in tables and graphs, a flip chart is a poor tool for communicating a text based risk management explanation that goes beyond bullet point phrases and explains how.

Instead, this risk management story needs to be woven throughout a hedge fund’s explanation about its investment beliefs and its investment process. This total storyline belongs in its own stand-alone marketing collateral document, presenting in sentence and paragraph form a cogent, compelling and linear telling of the hedge fund’s story of how it invests, and how it manages portfolio risk. Such a marketing collateral piece contains the subjective based information that an investment committee is going to be discussing when debating whether to allocate to one manager or another, when performance is similar. Importantly, this is the very content that differentiates a portfolio manager from his or her peers, and this is what lies at the core of brand differentiation among portfolio managers.

There is double-duty use of this investment risk management copy as it also supplies the needed content for responding to DDQ and RFP essay questions that ask for elaboration about a hedge fund’s risk management protocols.

While the savvy hedge fund firm owners recognize that they need to be able to communicate about how they handle portfolio risk management through their research and security selection, asset allocation-based decision making, trade execution, and portfolio monitoring, the savvier ones know one thing more: whether their risk management process is going to be perceived to be of institutional quality. So, how can an emerging manager hedge fund, or even a large established hedge fund, make that determination?

Do the work, gain the branding advantage
Crafting the needed explanation of a fund’s investment process, with risk management considerations woven in throughout, requires taking a buyer-focused re-examination of how the portfolio manager thinks and invests, and taking what may just be in that manager’s head and putting it into print. Being able to respond to the governance, controls and reporting questions about portfolio-related risk management requires having investment and risk management policies and procedures and staff oversight in place, along with a paper trail documenting transparency and reporting that investors want to see.

The hedge fund firms that make it easier for prospective investors to gain comfort factor about how their funds seek to identify and manage risk in running their investment portfolios are the ones that will begin to develop a brand identity for how they invest and find it easier to out-market competitors and attract assets.

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© 2025 Frumerman & Nemeth Inc.

Bruce Frumerman is CEO of Frumerman & Nemeth Inc., a 37-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.