By Rowen Pillay – Edgefolio: Congratulations. You’re 3 years into your journey as an emerging hedge fund manager. Only the strongest have survived, and your fund is one of them.

3 YEARS IS A MILESTONE FOR ALL HEDGE FUND MANAGERS

• Three years is a common prerequisite for institutional investment, and the minimum timeframe requirement for a listing on Morningstar.
• Most emerging fund managers fail within three years. You should be proud that you’ve braved the odds and are still here…
• Especially tough during two bear markets and the worst pandemic for over a century!

However, now the really exciting and challenging opportunities begin. All successful emerging hedge funds will be looking to leverage their three year survival to increase their AUM. Institutional capital is inevitably an essential part of this.

Institutional investors have greater resources, impact and influence on the market and the assets they invest in, therefore –

• You need to figure out your strategy’s true capacity, then when and how you’re going to prospect professional investors.
• Institutions rarely invest with solely their own money; this means grappling with the considerably more robust governance and due diligence requirements of their clients, customers and shareholders.
• Bigger portfolios also mean bigger allocations, leading to higher initial subscriptions than HNW, wealth managers or family offices.

BEFORE MARKETING FOR INSTITUTIONAL INVESTMENT, DEFINE YOUR IDEAL INVESTOR

Before you pitch, or even start to plan your roadshow, get your sales and marketing team to create a ‘Buyers List’ of your ideal institutional investors. Make sure they consider the following criteria:

• Who will they be? Corporate pension providers? Public pension providers? Sovereign wealth funds?
• What sort of expertise do these investors have in your sector? How might this impact their DDQ processes?
• Are they investing in your competitor’s funds?
• How much do they typically invest in emerging funds of your size?
• Will they be able to give you your ideal amount when you need it?
• What’s the time zone of the company’s main office(s). If your key contact operates in a very different time zone, this might make it harder to arrange meetings.

ONCE YOU’VE CREATED A LIST OF IDEAL BUYERS, GET READY TO PITCH YOUR EMERGING FUND

Leverage and grow your network through LinkedIn, attend in-person or online conferences, send great prospecting emails, and write thought leadership content that will appeal to your ideal investors.

The way you engage, get investors to feel confident about you, and build relationships, are just as important as the technicalities. You want them to get enthusiastic about working with your team before they commit any capital to your fund.

FIGURE OUT HOW TO ANSWER THE ‘WHY YOU?’ AND ‘WHY YOUR FUND?’ QUESTIONS

Hedge funds must differentiate themselves to survive.. Focus on developing a consistent narrative to avoid confusing your investors. They need to understand what the opportunity is, and how you, as an emerging fund manager, can take advantage of it.

• What makes you, your strategy and your team investable?
• Why should this investor pick you and not thousands of other fund managers?
• Research your competition and peers rigorously so you can confidently differentiate yourself from other emerging funds.

BE PREPARED FOR TOUGH QUESTIONS ABOUT YOUR EMERGING FUND’S PERFORMANCE

You need an exceptional track record and a coherent investment strategy which can withstand intense scrutiny. An institutional investor will quickly become sceptical if your claims don’t correlate with the data.

For example, if you market your emerging fund as generating consistent alpha, and the majority of the companies you invest in are US-based equities, an institutional investor would expect you to outperform a reliable market index, such as the S&P 500. Contrast that to if, from March 2020 to December 2021, your fund grew by 50% and had significant exposure to US tech stocks, that would be a substantial underperformance compared to the S&P 500’s exceptional 100% growth during that same period.

The lesson here: know your stats and contextualise them confidently.

BE TRANSPARENT ABOUT YOUR EMERGING FUND

Institutional investors need to know their capital will be safe in your hands. So be honest: if you took a risk that didn’t pay off, how did you analyse and evaluate?

Other topics that might be on your institutional investors’ checklist:

• Tax: What are the tax implications of investing in your emerging fund? Your investor will need to look at any potential pitfalls and tax issues they might be exposed to. Be prepared to address concerns.
• Diversity: More institutional investors are asking investment managers about their commitment to diversity, equity and inclusion (DEI). Research by Credit Suisse has found that firms with women strongly represented in their senior management enjoy a diversity premium consisting of higher spare price returns. Hedge funds are frequently criticised for their lack of diversity, yet 9 out of 10 hedge funds surveyed by the AIMA said improving DEI was ‘very important’ or ‘important’ for sourcing talent. Less than 5% of hedge fund managers have a formal DEI initiative, so those that do could stand out against their competition.
• ESG: Similarly, more institutional investors are demanding to see ESG incorporation. How do you screen the assets you invest in? Have you generated alpha from integrating different types of ESG factors into your portfolio? Do you know which ESG issues your ideal investors are most concerned with when considering emerging funds for their portfolios?

REMEMBER: YOU’RE IN THIS FOR THE LONG HAUL

Expect to meet with your prospective investor(s) several times over the course of 6-12 months. That’s because it’s normal for institutional investors to meet with hundreds of fund managers each year. Many also need to strategically adjust their portfolios before they can re-allocate any capital, so timing is everything

So be patient and disciplined. Focus on building your relationships first.

FIVE WAYS A DIGITAL FUND MARKETING PLATFORM CAN HELP YOU SECURE INSTITUTIONAL INVESTMENT FOR YOUR EMERGING FUND:

• Use the best-in-class technology and tech stack

Institutional investors will expect your investor relations platform to be just as robust as that of a seasoned investment manager. Fortunately, with Edgefolio’s FundPortal, you can streamline your tech stack in an all-in-one client communications platform.

• Scale your business development

Growing an emerging fund is never a smooth process. Fortunately, with Edgefolio, you can harness the power of an investor portal, dataroom, CRM, behavioural analytics, peer analysis, email campaigns, and more, all from a single fund marketing platform, to deliver consistent AUM growth and retention.

• Tell your story through marketing

Without effective, consistent and engaging fund marketing content, you’ll find it harder to manage your long-tail of prospects and build relationships with your ideal institutional investors.

• Attract more investors – raise more assets – make more money

This article features in HedgeNordic’s “Powering Hedge Funds” publication.