Beware the Three P’s

This article recently appeared in Opalesque New Managers (Issue 61, May 2017) – an online news publication focusing on the global emerging hedge fund manager.

We often hear hedge fund managers say that marketing a fund all boils down to “pedigree, process and performance.”  It’s important to note that many of these managers are marketing their funds primarily to high-net-worth investors.  We believe that these managers are inadvertently defaulting to an institutional approach—one that will not serve them particularly well in the HNW marketplace.

The “three-P approach” to marketing might make sense for a fund targeted to the traditional buckets typical of large institutional investors.  After all, a fund that practices a fairly conventional investment discipline may have to compete primarily on the basis of managerial experience, investment process, infrastructure and track record.

In the HNW alternatives space, however, fewer and fewer investors are thinking in terms of traditional buckets or mandates.  To the contrary, they are increasingly looking for innovative alternative investment strategies with inherent performance advantages and little correlation to the performance of the traditional disciplines.

Accordingly, the three P’s may not prove particularly persuasive to this audience.  Let’s take a closer look at why.

 

1 | Pedigree

It is rare that a manager’s pedigree is so unique and exciting that it will stand out from the pack and grab the attention of HNW investors.  Moreover, it’s common knowledge that plenty of well-educated, highly experienced financial professionals have failed to achieve success as hedge fund managers.

So why do managers tend to place so much emphasis on their pedigree?  We don’t believe it’s due to arrogance.  Rather, it probably stems from their lack of long-term hedge fund experience.  Without a track record or reputation in the alternatives space, they may feel that investors will not listen to them unless they first establish an array of countervailing credentials.

But, we look at it this way:  by the time an investor has agreed to hear your presentation or review your pitch book, they probably already know something about you—enough that they’re willing to spend a bit of time exploring your fund’s strategy and advantages before they need to delve deeply into your background.

That’s not to say that a manager’s pedigree is inconsequential.  It can serve as an important “credibility factor” after an investor has become interested in the manager’s investment strategy.  Pedigree addresses the question, “does this manager really have the expertise and wherewithal to deliver on their investment strategy?”

 

2 | Process

Occasionally, we come across managers who use the term “process” as another name for investment strategy.  But in most cases, it is used to refer to certain generic mechanics of day-to-day investment operations:  following a certain methodology for “idea generation,” using “screens” to evaluate investment opportunities, performing “due diligence,” and ultimately funneling a vast universe of possibilities down to a handful of actionable investments.

This litany merely reveals that the manager does what they must do—basically the same stuff everybody else does.  It doesn’t tell investors what they really want to know:  how the manager’s strategic approach is special and why it deserves their attention.

 

3 | Performance

So, what about performance?  We believe that, if an investor doesn’t yet understand and value your investment strategy, why should they care about—or trust—your numbers?  If the numbers are good, what’s to say they’re not just the result of luck and circumstances rather than the product of a sound, replicable strategy.

On the other hand, if you’ve presented a clear, compelling case as to how you generate profits, your performance can serve as an effective proof statement, illustrating that your strategy works not only in theory, but also in fact.

 

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Our Advice:  Lead with Strategy

In a presentation or pitch book aimed at HNW investors, we recommend giving top priority to your investment insights and strategy—how you invest and why.  Because this is what can differentiate you to investors and drive home how they might benefit.

Once you have fully communicated your insights and strategy, you can then unleash the power of the three P’s to add layers of credibility.