Keys to Raising Hedge Fund Capital

     Anything is possible no matter how bad the odds are.

There are three things you have to remember, when you raise capital:

a.      Highest quality product

b.      Highest quality marketing message

c. Highest quality distribution

One problem lot of hedge fund managers have is they don’t really know how to evaluate themselves you know they don’t completely understand what the evaluate factors investors use to select hedge funds. Performance is a lot more important than most people think you know performance tends to be a screen that you have to know rank above let’s say the top 10 percent of hedge funds and if you fall through that then all other factors people look at are equally important, the problem is if you’re in the top 10 percent of hedge funds you rank in the top 1,500 hedge funds.

The other reason a lot of hedge fund managers have difficulty evaluating their product is because.

What are the factors people focus on well the first is obviously they will strengthen your organization you know a minimum you have to be able to pass operational due diligence exam and if you’re an emerging manager you don’t want the first exam you do to be with a really large investor that’s going to potentially allocate your funds because you’re probably going to find something that’s wrong and when they do they’re never coming back and then you’re gonna fix it you’re gonna go to them and say hey we fix this and it’s too late so you should try to have a mock operation of due diligence exam make sure you have that nail down and maybe go through a mock one every few years just to make sure you know you’re very fine-tuned for it but you know organization means a lot of other things too. 

Investment team is very important and hedge fund manager are good talking about their own background but what I think they tend to lack is talking about the team you know the strength and depth of your investment team is a way to differentiate your firm and when you hire someone it’s very important you’re hiring someone with very good talent it’s also important you don’t have a lot of turnover, turnover is a negative so you can enhance it and again it just takes a little bit to be the difference between getting account and being a firm they think is pretty good but you don’t get the money so if you have a team it’s very important to bring out the strengths as a team have people meet the entire team and you know get as much out of your team as you possibly can get investment philosophy and process if people don’t understand the inefficiency that you’re going after and what your differential advantage is getting that inefficiency they’re not gonna invest.

Risk Controls and Portfolio construction

You got to have a product that people want to buy. There are a lot of portfolio managers who have very strong belief on how you should create a fund and at times it’s just not what people want and sometimes you can make very small tweaks to the portfolio construction and risk control and you can get a product that you’re getting very slow growth to get exponential growth.

If you want to raise money you got it but if you really want to get to be a large manager you got to get rid of this component of your portfolio and having someone change what their deep philosophical belief is not easy but they decided they wanted to do it and once they did it was very easy to sell this product you.

You need to change your wrist controls.

Performance is important you got to be above a certain level but you also need to know you what you’re selling absolutely turns are you selling Sharpe ratio are you selling the correlation, are you selling how you do in down markets and you have to understand what the markets wants to buy. 

There’s interesting things about selling hedge funds the first is how small of a community it is you know investors share information and if an investor hears about your fund two other people unrelated to your firm he is much more likely to invest in your fund than if all he does is hear it better from you so that requires a lot of penetration in the marketplace if you really want to be a billion-and-half and right now you’re 200 million or 300 0r 50 you really need more than one person penetrating the marketplace in in order to get that deep and create a buzz money is going to hedge funds of the strongest brands not the best track record and to get that brand requires a lot of meetings, you also need to get momentum of assets growth there’s this discussion in the hedge fund industry about this magical number that when you get to a hundred million it’s going to be a lot easier to sell your font.