Hedge Funds and Funds of Funds
With an estimated 4,100 unique single manager hedge funds
and more than 1,200 funds of funds, the atmosphere for raising
capital perhaps has never been so competitive. Banned from
advertising by the Securities and Exchange Commission, emerging
hedge funds and funds of funds must find other avenues for
acquiring assets. Luckily, there are four strong avenues for
smaller funds to find investors: commercial and proprietary
databases, industry publications, internal or third party
marketing agents and word of mouth. With the proper preparation,
hedge funds and funds of funds can take advantage of these
capital-raising opportunities and steadily grow their assets
Commercial and Proprietary Databases
Perhaps the easiest way to widely disseminate information
on your hedge fund is the data vendor. Hedge fund databases
first burst on the scene in 1990, when Antoine Bernheim started
publishing the U.S. Offshore Funds Directory. In 1994, MAR
and HFR began printing their own directories. But on May 29th,
1997, what is arguably one of the most important events in
hedge fund history took place. That day the SEC issued its
no action letter to Lamp Technologies, Inc., giving Lamp and
others that would later rely on this letter the ability to
disseminate information on 3(c)1 and 3(c)7 SEC exempt entities
on password protected internet sites. Alex Shoegren launched
Hedgefund.net soon thereafter, and was followed by Tass, Altvest,
HFR and others. Below, you will find a list of the major commercial
and proprietary databases.
Hedge Fund Data Vendors
|Barclay's Global HedgeSource
|CISDM (formerly MARHedge )
|Eurekahedge Asian Hedge Fund Database
|Hedge Fund Intelligence(Bank of Bermuda/AsiaHedge,
InvestHedge and EuroHedge databases)
|Hedge Fund Research (HFR)
|Morgan Stanley Capital International
|U.S. Offshore Funds Directory
|Van Hedge Fund Advisors
HedgeFund.net is perhaps the most widely used database currently
available. In fact, in a survey conducted by PerTrac in 2002,
more than 70% of alternative investors responding subscribe
to the HedgeFund.net. However, many investors recognize that
one data source isn't sufficient to capture the entire hedge
fund universe. In the same survey, more than 67% of respondents
used one or more pay databases, available for between $3,000
and $7,000. However, few investors subscribe to more than
3 databases. This makes it imperative for managers interested
in capital introduction to make their data available to as
many data vendors as possible. In addition, you should not
overlook proprietary databases like those of Van Hedge Fund
Advisors, LJH and the Hennessee Group. These organizations,
and others like them, maintain internal databases for their
consulting clients and proprietary products. Inclusion in
a company's proprietary database may the only way to be considered
for an investment from that company or their clients.
Once you have elected to make your data available, it is
crucial that you keep it up to date and complete. Most investors
will screen a database based on a set end-date. For example,
an investor screening for new funds in early February may
screen only those funds whose data is up to date through December.
If you information is not updated, you are out of the game
before it even begins. You should also attempt to include
as much information as possible in the database. Do not assume
that investors are not interested in information such as assets
under management, service providers, etc. Those could be important
factors in their data screening process.
Industry publications have also proliferated wildly since
the early 1990s. Some of the more well-known publications
include, Hedge Fund Alert, Infovest 21, Alternative Investment
News, Albourne Village, HedgeWorld, EuroHedge and others.
These publications often publish short articles on new fund
developments and are read by hundreds of potential investors.
If you are opening a new fund, hiring personnel, or moving
to a new location, it might behoove you to make this information
available to one or more of these publications. Some publishers,
including EuroHedge and MARHedge, even list funds and performance
in their monthly publications. Others, like Infovest21, have
gone so far as to schedule regular mini-conferences to introduce
managers to prospective clients.
Internal and Third Party Marketers
Given the competitive atmosphere for capital introduction,
many hedge funds and funds of funds have elected to create
a dedicated marketing staff. As direct employees of the company,
these professionals provide both capital introduction as well
as client servicing functionality. In return, most require
both a base salary and a share of the performance fee. Additionally,
the hedge fund or fund of funds manager must provide workspace,
travel expenses and benefits to the internal marketer.
For managers who desire the services of a capital introduction
professional, but who do not have the budget or space for
an internal marketer, a third party marketing firm may be
the solution. A third party marketer provides capital introduction,
and more limited client service, in exchange for a percentage
of the management and incentive fee or of assets raised. These
fees range from 10% to 20% of fees or from 25 to 100 basis
points of assets placed. The manager is not responsible for
normal business expenses (travel, computer and office equipment,
etc.), and therefore has no upfront or ongoing capital commitment
until the third party marketer brings in an investor. Additionally,
cap intro fees may sometimes be paid with soft dollars, which
provides additional relief to an emerging manager.
Both internal and external marketers will be responsible
for introducing new prospective investors to the fund. This
may be accomplished by contacting current or past clients,
or by networking at conferences and other industry events.
In general, marketers will register potential prospects with
the manager to "claim" them as clients. This guarantees
that payment is made on appropriate clients, as well as to
eliminate the possibility of duplicate effort.
Finally, many prime brokers offer capital introduction services
for their clearing clients. These services range from the
most basic marketing to full-blown conferences where managers
can meet a significant number of potential investors at one
Word of Mouth
Word of mouth, once the only way to find out about new managers,
remains a mainstay of the industry today. Conferences afford
great opportunities to network with investors, consultants
and funds of funds in an attempt to find new investors and
create a positive buzz. Some of the major conference organizers
include the following:
|Information Management Network
|Institute for International Research (also
ICBI - Offshore arm of IIR)
||www.iir-usa.com / www.icbi-uk.com
Many of these and other conferences offer exhibition opportunities,
as well as speaking engagements, to hedge fund and fund of
funds managers. Still others organize investor "roundtable"
events, designed to bring managers and investors together.
Investment in a conference can be steep, however. Unless you
are invited as a "free" speaker, you can expect
to pay between $5,000 and $10,000 for the pleasure of presenting
your fund or manning an exhibit booth. In addition, you will
be responsible for all travel expenses. Still, carefully selected
conferences can be highly beneficial to new and emerging managers.
Building Performance Reports that Get Results
With competition keen, attracting the attention of investors
is hard work. And, you only get one chance to make a first
impression. Likewise, client retention is critical to the
long-term success of your firm. For these reasons, it is imperative
that marketing materials (particularly performance reports)
are as attractive and informative as possible. They must be
built to tell your story in the most compelling fashion and
to highlight your particular strengths. To build a good performance
report, it is crucial to understand the statistics you use,
to showcase your competitive advantages, to select appropriate
benchmarks, to include market and portfolio commentary, as
well as important investment information. Finally, you must
be willing to provide multiple delivery methods that suit
every potential investor's style.
Understand the Statistics
The first stage of building a high quality performance report
is to choose relevant statistics and to calculate them correctly.
Most investors expect to see the following statistics on a
Compound Annual Return
Annualized Standard Deviation
Correlation to Benchmarks
While this article is not intended to be a lesson on statistics,
it is important that all of these statistics are calculated
correctly and according to industry standards. For a voice-accompanied
presentation on investment statistics, please visit www.pertrac.com.
In addition, you will also find formulas for calculating common
Once you have covered the basics in your report, you may
want to consider showcasing your fund through the use of additional
statistics. For example, many investors started their investment
careers in the traditional world, where high standard deviation
is always defined as "bad." However, as we all know,
standard deviation is nothing more than a measure of predictability;
a fund can have a high standard deviation and never post a
losing year, or can have a low standard deviation and consistently
lose money every year. If upside volatility has left you with
a high standard deviation, and, as a result, your Sharpe ratio
is not what you hoped, you may want to consider also including
your Sortino ratio on your report. The Sortino ratio is based
on downside deviation, or volatility below a certain minimum
acceptable return, rather than your entire return spectrum.
The figure below illustrates the basic concept of downside
deviation. Using a minimum acceptable return of 10%, the downside
deviation of this investment considers only those returns
below the green line - our MAR.
Once you have calculated your downside deviation, you can
then calculate the Sortino ratio of your fund by using the
Another statistic you may want to consider is your percent
profitable months. Perhaps your fund has had some large drawdowns.
To distract attention from this blemish, you might emphasize
that you fund performs well in most months..Simarly, by displaying
rolling return calculations, you can encourage investors to
look at the entire track record, rather than arbitrary 12-month
Although you cannot hide from the realities of your fund's
track record, providing a variety of relevant statistics in
a well-designed performance report will go a long way toward
insuring that you make it to the second round of due-diligence.
Showcase Competitive Advantages
It is, however, important to remember that most statistics
are intended to be used comparative measures rather than absolute
numbers. For this reason, it is often helpful to put your
numbers in perspective by incorporating thoughtful peer group
analysis into your presentation. In its most basic form, peer
group analysis is nothing more than percentile rankings. Using
these percentile breakpoints, you can determine how your fund
ranks against peers on a number of different statistical factors.
Now, instead of simply saying that a fund has a compound annual
return of 14.1%, you might be able to say that the fund is
within the top 20% of the managers within your particularstrategy.
This kind of analysis makes a much more powerful impression
on a potential or current investor.
Be sure to run peer group analysis on a number of statistical
factors. A fund may be at the bottom of its peer group for
returns, but may rank among the most attractive funds with
regard to volatility (as measured by standard deviation and
downside deviation). This would make your fund a prime target
for those investors who desire a cash management alternative.
Another fund may rank at the bottom of its peer group for
standard deviation and Sharpe ratio, but may lead its peers
in annualized returns. There is an investor appetite out there
for just about every return profile. It is up to you to understand
your profile and use it to your best advantage.
Select Appropriate Benchmarks
Prospective investors want to know how your fund's performance
history compares to relevant benchmarks. To that end, you
do not want to benchmark a long/short equity fund to T-bills,
an Asian fund to the S&P 500, or technology fund to the
Dow Jones Industrial Average. Take care in selecting your
benchmarks, looking for those that provide the closest comparison
to your fund, not just those with which investors may be familiar.
Consider using a strategy specific hedge fund index (available
from most of the major index providers), as well as a market
benchmark and, if available, a long-only (mutual fund) benchmark.
Include Market and Portfolio Commentary
Statistics alone do not tell the complete story. No performance
report is complete without market and portfolio commentary
to put the numbers in perspective. Your market and portfolio
commentary should include such information as:
- What is your view of the market? Where has it been? Where
is it going?
- How has the fund been positioned to profit from market
conditions? What changes (if any) will be made going forward?
- What positions have worked well in the past month? What
was done with those positions? Are they still being held?
Were they pared back? What about the "losers"
in the portfolio?
- What are the largest positions within the portfolio? Why
were these positions selected?
It is important to provide a certain level of transparency
within your performance report so potential investors can
get an accurate picture of your fund and strategy. However,
it is incumbent upon you to determine how much transparency
you are willing to provide. Many short sellers, for example,
list industry breakdowns rather than individual positions
in their reports, to avoid the possibility of a short squeeze.
Others list positions only after they have been exited. You
must make a decision on transparency early in the life of
your fund, and then stick to it. If you change anything about
the information provided, it should always be to provide more,
Include Investment and Contact Data
It is alsoa good idea to provide an outline of the fund's
structure and full contact data on every performance report.
That means listing your entry and exit dates, lock ups, notice
period, minimum investment, fees and service providers, as
well as full contact details for primary personnel. Without
this information handy, investors are forced to search through
your confidential offering memorandum and other documentation,
which can only lead to frustration and perhaps thwart investments.
Provide Multiple Modes of Delivery
Investors are curious creatures. They want maximum information
with minimal effort, and each may define this differently.
Some investors will always want hard paper copies of your
performance reports physically delivered by mail. Others will
demand Adobe .pdf versions in their email in-box. Still others
may want to simply log on to a website to view information
at their leisure. It is up to the fund manager to provide
access to information in a variety of ways to meet every investor's
Finally, marketing materials should look like they took time
to produce. However, you want to minimize the time required
to construct the template and refresh the materials with each
month's updated information. Luckily, there are several software
options available to make performance analysis and reporting
Performance is important, but image is everything. How many
times have you seen managers with superior performance fail
to attract investor attention? Make no mistake; attractive,
well-presented marketing materials are a necessary ingredient
to the ultimate success of your fund's marketing efforts.
These guidelines will help you tell your unique story in the
most effective way. The rest is hard work and persistence
on the part of your marketing representative.