Why hedge funds should embrace brand marketing to grow assets
In the early days of hedge funds, many managers didn’t need to market themselves very aggressively to grow assets and find new customers. That era is over. Today, the market is so crowded and competitive that it's nearly impossible to stand out without a strong brand and a consistent message. In fact, one of the most frequently cited challenges by respondents to Imagineer Technology Group's annual fund marketing and investor relations survey is how to convey their firm’s value proposition relative to the competition.
If it is true that most fund managers are struggling to raise assets, and communicating a value proposition to accredited investors is harder than ever, why aren't all hedge funds taking advantage of all the tools available to them to build and market their brand?
In my experience, there are a couple of reasons why hedge funds fall short in this area. The first is that, due to the background of their founders, many asset managers simply don’t understand the role marketing can play in their growth. A large percentage of hedge fund principals came up in what are now large, established funds or banks where marketing "wasn’t needed" due to the reputation of the founder(s), or was handled by a group of men and women that they never really got to know. What’s more, many of the legacy firms that did have marketing teams took more of a reactive approach to the function because of their long tenure and stable institutional client base. Many fund managers seem to share the sentiment that because marketing and brand-building require long-term investment and aren't activities they're well-versed in, they needn’t devote resources to them. Instead, they focus all of their attention on the portfolio, security analysis, and trading execution.
The other reason, perhaps more misguided than the first, is that hedge fund managers are often mistaken about what they are legally allowed to say and do from a marketing and brand-building perspective. There is a widely held misconception that as a registered investment adviser you're setting yourself up for trouble with the SEC if you even talk about your business publicly. As such, many managers choose to say and do nothing about their brand so that no one can accuse them of trying to solicit non-accredited investors.
Both of these reasons are short-sighted and neither holds up to scrutiny.
The latter point is simple to address: the SEC has published guidelines that very clearly lay out what you are and are not allowed to say in your marketing. The definition of what constitutes an advertisement is fairly broad in Rule 206(4)-1 (the “Advertising Rule”) but its purpose is simply to prohibit an adviser from directly or indirectly publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading.
It includes four primary prohibitions:
- Advisers Act Rule 206(4)-1(a)(1) (prohibiting advertisements that refer, directly or indirectly, to any testimonial concerning the adviser or any advice, analysis, report or other service rendered by the adviser);
- Advisers Act Rule 206(4)-1(a)(2) (generally prohibiting an adviser from advertising past specific recommendations of the adviser that were or would have been profitable to any person);
- Advisers Act Rule 206(4)-1(a)(3) (prohibiting advertisements claiming that any graph, chart, formula or other device can by itself determine whether to buy or sell a security); and
- Advisers Act Rule 206(4)-1(a)(4) (prohibiting advertisements that offer purportedly free reports, analyses, or services).
When you boil it all down, determining whether any given communication constitutes a prohibited general solicitation or general advertisement involves two easy-to-answer questions:
- Is the communication classifiable as a general solicitation or general advertisement?
- Is the communication being used to offer or sell securities?
If the answer to both questions is “no,” the communication is permitted under Regulation D.
So, now that we know what advisers aren't allowed to say, how do we determine what they can?
Well, although a fund adviser should not mention its funds or the fact that it is seeking investors publicly, it can talk about its advisory business and market its overarching investment philosophy and brand. Put differently: advisors are free to tell their story.
Advisors may not be permitted to solicit investment in their funds, but they are free to TELL THEIR STORY...
When you understand that you can share your story and market your brand, it becomes very easy to see how marketing can be hugely influential in your long-term growth.
At its most basic level, for registered investment advisors, marketing provides an opportunity to tell people your story and why you are “better” than the other firms out there. In an increasingly crowded industry, you need to focus on communicating your value proposition to expand the reach of your brand. Many fund managers erroneously believe that returns are all that matter and that if they produce great returns, their funds will attract assets all by themselves. The truth is, returns from manager to manager tend to be fairly similar across strategies and asset classes, especially over a longer time horizon. So, it’s essential to find another way to stand out. If the only information about your firm, your GPs, and your strategy is contained in a powerpoint deck you leave behind after meeting with institutional investors, the odds of standing out are slim to none.
Looking across the industry, there are many examples of highly successful firms whose growth has been supported by brand-focused marketing. Take the top 15 hedge funds, for example. Twelve of the fifteen have excellent websites, actively publish content, and clearly extol the virtues of their investment philosophy publicly. These firms are big enough that their names speak for themselves, but they are clearly investing in engaging and insightful websites and other content which showcase thought leadership pieces, relevant data points about their businesses, and information about their investment strategies. More importantly, they have been doing so for a long time!
These firms aren’t soliciting investors on their website or touting their returns. They’re telling their stories and demonstrating their relevance and importance as trustworthy advisers and stewards of sacred capital. These are the kinds of marketing initiatives that instantly generate credibility with all types of people.
Other firms have seen success in building around the personal brand of key individuals. One example is Bill Ackman of Pershing Square. Mr. Ackman openly talks about his opinions and philosophies, making sure to include disclaimers before or after as necessary. Not only does this kind of insight present him as a thought leader to the public, but it also provides transparency into his hedge fund, which is appreciated by his investors, who want to know where their money is going.
I believe that advisers that do not tell their story run the risk of getting lost in a sea of competition - especially in the early days. A differentiated website, thoughtful content, and public profile can help you tell your story and convey the value you bring to the table. On the flipside, the lack thereof tells a pretty revealing story, too. By not telling your story, you’re essentially saying that you don’t believe it matters enough to be told.
If I can leave you with one thought, it’s that your hedge fund has a brand, whether you’re actively crafting it or not. While it is possible to have success without marketing, investing in your brand and your message will make it easier to obtain. Obviously, you should seek the guidance of your legal counsel, compliance team, and other trusted partners in crafting and conveying your story, but you owe it to yourself, your team, and your investors to make sure it is heard.
An earlier version of this article was published by ValueWalk