Technology has proven to be a boon to hedge fund managers and investors alike over the past seven years. What was once an arduous search and investment process primarily performed in person and through word of mouth has become a seamless process almost entirely managed from the comforts of your office. Indeed, the introduction and proliferation of hedge fund database and analysis platforms, web sites, web meetings and teleconferencing, the process of marketing, finding, analysing and monitoring hedge funds has perhaps never been easier.
Hedge Fund Databases and Analysis Tools
Not too long ago, finding hedge fund managers was a blend of skill, luck and networking. The primary method for discovering new hedge fund talent was word of mouth and extensive legwork, with at least one company even going so far as to go door to door in New York looking at nameplates to discover new talent. The first directory of hedge fund information was published in 1990 by Antoine Bernheim and contained information on 70 offshore funds. Other paper directories followed, and while they were an improvement over the existing methods for gathering hedge fund data, they still proved unwieldy, lacking any kind of apparatus for methodical hedge fund searches. Attempts to analyse the data involved retyping information into Excel™ or Quattro Pro™ spreadsheets and entering formulas for calculation and sorting. The first electronic platform was a MS-DOS programme built through an affiliation between MAR and Burlington Hall Asset Management. In 1996, Strategic Financial Solutions, LLC (SFS) recognised the need for a more comprehensive platform that could utilise input from virtually any commercial database. Today, SFS continues to offer multi-database analytic capabilities through its flagship PerTrac 2000 desktop software platform. Others, including InvestorForce and HedgeFund.net, offer single-database analysis via the Internet.
Since 1997, the electronic data market has grown exponentially.
There are currently 12 major hedge fund databases available
commercially either coupled with or downloadable into analytic
packages. Although generally assumed to overlap substantially,
a recent SFS study showed that when as many as nine of these
databases were combined, each database still had between 100
and 400 unique funds. As a result, approximately 26% of hedge
fund investors subscribe to two or more databases. By simply
purchasing one or more of these databases and putting it into
one of the web based or desktop software platforms gives investors
instant access to thousands of funds, full statistical and
qualitative searches, sophisticated portfolio construction
and asset allocation, peer and style analysis, Monte Carlo
simulations and more.
|Alternative Asset Center||www.aa-center.net|
|Barclay's Global HedgeSource||www.barclaygrp.com|
|Hedge Fund Intelligence (Bank of Bermuda/AsiaHedge, InvestHedge and EuroHedge databases)||www.hedgefundintelligence.com|
|Hedge Fund Research (HFR)||www.hfr.com|
|Morgan Stanley Capital International||www.msci.com/hedge|
Likewise, hedge fund managers have benefited from the proliferation of electronic platforms for data collection and analysis. Easier access to information has increased awareness of the industry and has, therefore, been a significant factor in the growth of assets. In fact, an SFS study shows that 93.8% of alternative investment professionals use a hedge fund database. Hedge funds that choose to report to a database therefore have an instant pool of potential investors. It is worth noting, however, that because only 26% of investors use more than one pay database, reporting to all of the databases can be a key issue for managers. If a fund reports only to one or two, or none at all, they may miss out on a substantial number of prospects.
Hedge funds also now have unprecedented access to information on other funds in the alternative investment universe. This information, easily manipulated and analysed using analytic platforms, allows hedge funds to construct marketing materials with complex style and peer analysis, helping to attract and keep investor allocations. More recently, one fund of hedge funds (FOF) database has begun providing specific detail about the underlying constituent funds contained in the FOF's portfolio. Armed with this information, a hedge fund manager is able to better target marketing efforts. Moreover, using portfolio construction software, a manager can demonstrate factual evidence as to the contribution their fund will make to the existing blend of managers.
The Benefit of Building Web Sites
Our estimates show as many as half of all hedge fund and fund of hedge funds managers have a web site available for clients and prospects. In fact, if you type the name of a hedge fund strategy into a search engine, you're more likely than not to get at least a few "hits" that are fund specific. But why would so many hedge funds incur the time and expense to construct a web site that, by SEC regulation, may not be viewed by the general public? The answer is simple: a web site saves the manager marketing and client servicing time and money over the long haul.
A well-constructed web site can achieve a number of marketing and client servicing goals. In its most simple form, a hedge fund web site gives contact information for the manager, allowing potential investors to contact the fund directly and receive offering documents and marketing materials. Other sites offer registered clients and prospects access to performance history. More elaborate sites may provide detailed performance analytics and partner letters. Still others may offer limited partner-level access to account balances and K-1s. Indeed, the options available to savvy managers are seemingly endless.
The minimum requirements for managers who want to launch a site are relatively simple. Due to SEC regulations, information on the funds must be password protected and restricted to accredited investors. Therefore, all sites with more than simple contact information must have some sort of security protocol for current investors and an accreditation process (or information on how to complete the process) for qualified prospects. Once investors and prospects have gained entry into a site, most expect to see performance information at a minimum. However, most managers find that providing detailed analysis and commentary is a more efficient way to communicate with their clients.
Putting thoughtful analysis on the site, including peer group analysis and basic investment statistics versus benchmarks can both attract investors and keep current clients happier during hard times. Monthly commentary is also invaluable in the marketing and client servicing process, and having it available on your site saves time during the course of both due diligence and investor relations. Taking this a step further, managers may want to include portfolio reports, recorded conference calls or summary risk reports for investors and prospects that wish to monitor the fund, either prior to or after an investment being made.
Again, uploading this kind of information on a weekly or monthly basis can save time versus phone calls and emails. What's more, the process of setting up a website has perhaps never been easier. A wealth of programmes and printed guides can walk a manager through the process, and various firms exist to whom managers can outsource all or part of the process - from site planning to graphic design, from programming to hosting. If a manager constructs a basic site with little more than contact information, they may spend under $1,000. More elaborate sites, including graphic identities, security features and analytics may cost $10,000 or more to set up, but the payoff in time saved and clients earned could well be worth it.
Meet Me on the Internet
What could be better than conducting the bulk of your due diligence on client meetings over the Internet, without the time and expense of travel? Several services were launched during the past five years betting on just that premise. Firms like WebEx and platforms like Microsoft NetMeeting provide affordable and easy-to-use venues for Internet teleconferences. These tools benefit hedge fund managers and investors alike.
For investors, using Internet teleconferencing systems can save time and money in due diligence and ongoing monitoring. They can connect with potential and portfolio managers, review portfolio information, view trades, discuss risk reports and more, all without leaving their desks. While not perfect substitute for face-to-face meetings, these types of meetings can certainly supplement the due diligence and monitoring process, allowing investors to reduce the number of trips they need to take each year to visit managers.
For hedge fund managers, the benefits are even greater. Platforms like WebEx and NetMeeting allow managers to connect with a number of investors and prospects, saving time and money in travel expenses, and time on the phone and emails with individual investors. It is a good idea to schedule a monthly (or more frequent) conference call to answer questions like:
- How has the fund performed over the past month?
- 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 didn't work and why?
- 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 are the largest positions within the portfolio? Why were these positions selected?
What's more, Internet teleconference platforms are extremely easy to use. Most will send out invitations and meeting reminders, register participants and even record and playback calls. Investors can record calls for investment committee members or simple reference. Managers can record calls and store them for playback on their websites, giving investors and prospects on-demand access to portfolio information and commentary.
Online Publication Resources
The increasing popularity of hedge fund investments has inspired a number of new publications devoted to covering the industry. Many of these publications, including Infovest21, HedgeWorld, HedgeFund.net, FundNexus, and Albourne Village provide up-to-the-minute hedge fund news delivered straight to your email in-box. Investors can use hedge fund publications and web sites to supplement their due diligence process, find new funds, as well as research frauds and blow-ups. Managers can use the information to keep abreast of competitors, benchmarks and regulatory changes. They can also use the medium to announce new personnel, new funds, and asset milestones, which in turn can attract new investors.
The Future of Hedge Fund Technology
There are always new technologies on the horizon. For example,
FundNexus is attempting to change the way investors subscribe
to funds by offering a platform with uniform subscription
documents and direct electronic delivery to and confirmation
by administrators. Several companies are building custom platforms
for data collection that should further enhance the database
landscape, and one company even is building a platform that
will cross-check funds across databases to remove duplicate
funds and may one day offer data verification to the major
databases. There are also plans to rate hedge funds, much
like Morningstar did for mutual funds. Indeed, with all of
the advances made in past seven years and with grand plans
for the future, the process of finding funds and investors
can only continue to improve.