If you’re a leader at a hedge fund, chances are you’ll eventually need to be the bearer of not-so-pleasant news to your limited partners. From poor portfolio performance to negative returns to overall market volatility, some topics are just never fun to discuss.
Despite the discomfort you may experience when sharing bad news with your partners, it’s important to deliver the message effectively and with compassion. It’s also important to help your stakeholders maintain optimism and confidence in your investment processes in order to protect your reputation and assets.
To help you deliver a tough message effectively, we asked Steve Wilner, Chief Operating Officer at Arootah, to share his top tips. These strategies can help soften the blow of bad news, so partners leave the conversation feeling secure in their investments.
1. Take a Long-Term Mindset
Every smart fund manager knows that short-term negative market fluctuations won’t necessarily impact long-term success. Wilner recommends that fund managers foster a similar long-term mindset among investors and limited partners. If a portfolio is showing lackluster or negative performance, even if just for a singular period, it can make investors feel worried or anxious—but you’re there to put them at ease.
Encourage your partners to look at short-term drops in the market as opportunities for growth, rather than harbingers of more bad news to come. Coach them into a mindset of long-term results. Let them know that it’s okay to feel uncomfortable the market is down, but also remind them that, historically, the market always comes back up, stronger than before. Now is not the time to shy away, but rather take advantage of the dip, and to remember that investing based on emotions instead of facts is never a good idea.
2. Explain your Process
Everyone appreciates thorough communication, even when the overall news is bad. When it comes to more complex negative news, detailed communication is even more critical in maintaining your relationship with your limited partners.
Wilner says, for example, “When an investor gets their K1, seeing a burdensome tax liability is never welcome news. What’s even more problematic, is for a limited partner (LP) to see that they owe taxes while the fund’s performance was negative. It’s one thing to pay taxes when the fund is up, it’s a very tough message to deliver that the investor has lost money for the year and owes taxes.
Your LPs need to understand that the tax liability is solely based on realized gains and losses while fund performance shows both realized as well as unrealized gains and losses. While they won’t be happy the realized gains that caused the tax liability fell short of the unrealized losses that generated the negative return, reiterating your investment process is important. The fact you generated gains shows that you made money on that particular trade or position.”
Wilner continues, “Take the time to perform the analysis to understand at what price point you sold the position which generated the gain versus the year-end closing price to justify your decision to take the gains. Remind them of your investment process to reinforce your confidence that the current portfolio of positions will move higher and overcome the current unrealized loss.”
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3. Communicate Often
Just like you need to communicate thoroughly to your LPs, it’s also important to communicate often. Inform your clients about volatile economic conditions. Let them know that you’re available to talk if they have concerns or questions. Schedule meetings to review portfolios and reiterate the strategy behind investments.
Going dark is a surefire way to make your clients panic during unstable times. By keeping in touch, you can help them keep their emotions in check and prevent panicked phone calls, Wilner notes. Be proactive in communication, and you’ll help your clients remain calm and confident in your decisions.
4. Be a Good Listener
When communicating with your LPs, it’s important you not only speak articulately and thoughtfully, but that you listen with compassion. If your partners feel seen, heard, and that you truly care about their concerns, they’ll be more likely to remain calm.
While it can be difficult to hear about your clients’ fears or concerns, doing so is vital to maintaining a good working relationship with them.
5. Show Compassion
Whenever you deliver difficult news or listen to unfavorable feedback, show empathy. Your clients may feel that they are losing control of their goals and dreams for the future as a result of their plummeting portfolio values and losses. Putting yourself in their shoes and acknowledging their feelings instead of minimizing their situation can help you demonstrate empathy.
6. Show Them Where you Are and Where you’re Going
As you reiterate to your clients and partners investing and portfolio management is a long-term marathon and not a sprint, be sure to remind them of where you are now and where you’re headed.
Point to your fund’s long-term track record and how you’ve managed past volatility to get to where you are today, Wilner suggests. Emphasize how you’ll use that same experience to navigate and weather current volatility and to use tools such as cash management and hedging strategies to take advantage of price dislocations.
7. Stick to the Plan
After you’ve done your due diligence to communicate with, listen to, and reassure your clients, make sure you do your part behind the scenes to mitigate the risks to their investments. Follow through with that plan you communicated to them so effectively. Don’t make drastic changes to your portfolio management now; stay true to the process you’ve already put in place.
Just like you want your client to remain calm, Wilner explains, you need to remain calm as well and allow your investment decisions to reflect your composure and clarity of mind.
The Bottom Line
As a professional portfolio manager, you have a vision and plan. Communicating this vision to your limited partners can help you keep your clientele happy and secure your firm’s reputation.
If you’re having trouble communicating that plan effectively, Arootah coaches have years of experience helping executives communicate with investors, team members, and others.
Disclaimer: This article is for general informational purposes only and does not constitute legal, investment, financial, accounting, or tax advice, or establish an attorney-client relationship. Arootah does not warrant or guarantee the accuracy, reliability, completeness, or suitability of its content for a particular purpose. Please do not act or refrain from acting based on anything you read in our newsletter, blog, or anywhere else on our website.