By Diane Harrison
2017 will be a hard year for allocators and investors to get excited about hedge fund performance versus US equities. Hedge funds returned on average about 6% in the first 11 months of 2017, significantly lagging the stock market, which was up over 20% for the same first 11 month period.
Hedge fund defenders will say that hedged portfolios are not designed to keep up with a soaring stock market, but that song often falls on stubbornly deaf ears. However, December seems a good month to remind investors why alternative investments still have a core place in every portfolio. Here are several arguments in favor of including alternatives from some of my industry articles published throughout 2017:
Jan 2017: FOCUSING ON THE FEW TO FIND RESULTS
If we assume that the overpopulated hedge fund industry has been an aggregate lackluster performer, and that this universe comprises approximately 14,000 funds, then roughly 250 or so funds existing today are providing substantial benefits to their partners. This ‘power group’ generates performance regardless of what fees are being charged, what segments of the market they exploit, and what current regulations are burdening them.
Feb 2017: ALTERNATIVES ARE STILL IMPERATIVES
Although not shy in voicing their frustrations and disappointment with most alternative products, investors are nevertheless more committed than ever to being invested in the sector. Perhaps they have finally truly embraced the mantra of diversification and risk modification these products are meant to provide to portfolio management. While they still want to see wholesale improvements within alternative offerings, they are believers in the long-term allocation process, and managers must work to win them.
March 2017: STEMMING INVESTOR REDEMPTIONS
In terms of investment management, attracting investor capital and keeping this capital is more easily achieved through creating a positive and encouraging environment. Smart fund managers will create detailed and informative communication channels for their partners, including regular fund updates, insightful analysis on timely market topics, and a flexible range of options for investors to choose how to receive this information. While a fund’s performance can and will vary, consistency and dedication to the communication process should not. Make being an excellent communicator a lifestyle choice as a fund manager, and investors will reward this good behavior with loyalty.
April 2017: WHEN COMMUNICATION FAILS
A red herring is commonly considered as something that misleads or distracts from an important issue. It’s used typically by one party to divert attention from the real topic of interest of the other party. Historically, the term refers a particular dried red fish which has a strong and unpleasant odor. Investors are particularly sensitive to this avoidance tactic when they are unable to get answers to the issues that are most important to or concern them. If alternatives managers attempt to distract investors from getting to the heart of a sensitive issue, almost assuredly they will suffer the consequences. As Italian lore goes, “the fish stinks from the head.”
May 2017: INVESTORS DO NOT HAND OUT PARTICIPATION MEDALS
Successful investors are definitely not helicopter parents. They like winning and fully subscribe to the notion of rewarding alternatives managers who can deliver results. Investment management winners need to add differentiated value. Establish a clear market point of view that delivers value to investors, and make sure the investment practice mirrors this strategy. The alternatives markets are littered with the corpses of fund managers who said one thing to investors and proceeded to do an entirely different thing with their fund assets. Don’t be the fund with 75% of your client’s assets sitting in a money market for months or years, awaiting the next ‘great opportunity,’ all the while collecting fees of 2 and 20 for this privilege of earning next to nothing.
June 2017: THE BOOK TOUR APPROACH TO LAUNCHING A FUND
The only thing harder than running a successful alternatives fund is launching it. Getting noticed in the crowded and naturally skeptical alternatives market can be a Herculean feat without a plan of implementation. It goes without saying that having a great investment strategy, financial backing, and well-crafted infrastructure are all critical components of a successful fund launch. Here are a few additional pointers on how to capitalize on these elements by cribbing from another cutthroat process: that of a successful book tour:
- Contribute to financial web forums and become a thought leader
- Start a blog
- Record yourself
- Build a warehouse of investor recommendations
- Strengthen your distribution efforts.
July 2017: BOOM OR BUST—ARE ADVISORS READY FOR THE BOOMERS TO RETIRE?
Boomers have long been in the trend-setting vanguard of the past half century, with their population dominance shaping the growth of many sectors of the US economy. As the boomers begin to exit the workforce and enter the retirement phase of their lifespan, they will undoubtedly continue to exert outsize influence on the general population. Financial advisors will need to adapt their services and approaches to keep up with this segment in ways that are focused on these large-scale needs. Advisors particularly need to align their financial planning tools with the murky waters of healthcare costs. There will be little to guide advisors as healthcare struggles to accommodate such a significant demand on services that boomers create. Compounding this issue will be the complexities of a global financial dance that US interest rate policy continually seeks to navigate.
August 2017: SITUATIONAL AWARENESS: INVESTMENT PERSPECTIVE INTENSIFIED
Situational awareness means honing your ability to analyze the surrounding environment as an automatic practice while carrying on regular activities. From an investment perspective, sharpening one’s overall desired investment goals and how best to achieve them is an ongoing and dynamic exercise in diligence and critical thinking. Investment planning requires research, surveillance, analysis, and reasoned decision-making…much like military planning. The achievement of a long-term successful investment plan shares more than a few traits with executing a successful military operation. As plans change, course correction occurs, and variables waylay the best-laid goals, this flux demands clear-headed redirection on a regular basis.
September 2017: A PRACTICUM FOR AUM
There’s no denying that one of the biggest challenges small managers face is raising capital. To become large enough to turn a profit and expand is a common migraine that keeps emerging managers up at night. Forget fretting over last quarter’s performance: most of these managers obsess over not being able to add enough LPs to their fund before they run out of cash. There are several means of accessing actual prospects for emerging manager funds, with some give and take required to land the deal:
- Talk to seeders
- Find a ‘personal’ angel who knows you to invest in your fund
- Actively mine your referral network
- Develop a very clear 1-minute explanation of your value
- Consider taking on offshore investors.
October 2017: TALK FOR SHOW, BLOG FOR DOUGH
Despite being overused in finance, the golfing analogy ‘Drive for show, putt for dough’ bears relevance in alternative investments. While the bigger, flashier managers in alternatives often garner the most media and investor attention, smaller managers have a real chance to exhibit their investment acumen through the power of a well-crafted blog. Expand your investment voice beyond the numbers game of fees, rankings, and comparisons, and you can expand the potential investment base.
November 2017: CHALLENGES AHEAD FOR 2018
November is a good time to take an industry snapshot survey of portfolio managers, wealth advisors, regulatory professionals, and the like, and ask them a single question: What do you believe is the biggest challenge faced by the alternatives industry for 2018? Some of the answers included:
- Performance: alternative managers are going to continue to be pressured to demonstrate the value-add for investors
- Fee flexibility
- Finding alternative pockets of value that are sustainable
- Compliance with growing regulation issues
- Investment ideas that can scale
- Cybersecurity and the unknown risks it imposes.
As we move into 2018, alternatives managers will undoubtedly face a host of new issues and challenges in delivering to the investment community differentiated value. Here’s to best wishes for us all in the coming year!
Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets. She has over 25 years’ of expertise in hedge fund and private equity marketing, investor relations, articles, white papers, blog posts, and other thought leadership deliverables. In 2017, Panegyric Marketing has been awarded Global Fund Awards 2017 Financial Services Marketing Firm of the Year - NY, USA, Corporate Insider Business Excellence Awards 2017 Financial Marketing Firm of the Year – USA, and M&A Insider Awards 2017 Financial Services Marketing Firm of the Year – USA. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line. To read more of her published work in alternatives, please visit www.scribd.com/dahhome. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.