Times of market disruption are typically when active management is most important. It’s ironic, then, that bear markets can make LPs shy about investing in hedge funds. This insight was a key takeaway from Hedge Week’s recent report on emerging managers.
In their recent study, Hedge Week found that 62% of managers struggle to attract investor flows. Emerging managers struggle even more so—with 82% citing this as their biggest obstacle.
The absence of proven experience—a trusted track record—can make it harder for emerging managers. But this ‘disadvantage’ is more imagined than real. The data shows new managers tend to outperform their peers, with a 6.4% 12-month return, compared with 3.4% for the broader hedge fund field.
So, how can emerging managers attract investor flows? Here are five ways to get started.
5 Ways to Attract Investor Flows
- Create a strong message: All hedge funds want to generate positive returns regardless of market conditions. It’s important that your clients understand your unique selling proposition. What do you know that others don’t? And why are you the one to deliver it? It’s crucial to have an answer that’s both unique and credible.
- Leverage your relationships: Whether you’ve realized it already or not, your family, friends, and colleagues can help you jumpstart your capital-raising efforts. While it may not be for large sums, the sooner you can build an actual track record for your strategy, the more proof you’ll have to convince others.
- Consider different ways to raise capital: As a new fund, you may have to consider other strategies for bringing investors on board. Third-party marketers and seed arrangements can be a powerful strategy for managers, provided you are willing to give up a percentage of revenues. In addition, first-loss capital programs are another alternative, as long as you have some capital to invest.
- Build a solid infrastructure: If you want investors to take a risk on you, make them see and feel that you’re controlling as many risks as possible. You can’t control the market, but you can ensure that your business infrastructure meets the highest standards.
- Be creative with incentives and favorable terms: Investors can bring value beyond the capital they provide. Getting the right name on board can make the rest of a raise much easier. Consider inducements such as founder-class shares in these situations to get key investors over the line.
The Bottom Line
Ultimately, it’s your track record that potential investors will consider before allocating capital. For an emerging manager who is still building credibility, it’s crucial to make sure you do everything possible to put your best foot forward. With the right messaging, connections, and strategies, you’ll be able to grow your experience—and your investments—more quickly than you might expect.
Looking to attract investor flows for your hedge fund? Arootah Business Consulting leverages our experience across the key areas of a firm: investments and operations. Our experienced industry veterans support you throughout the entire life cycle: from start-up to raising capital to ongoing operations and beyond. Reach out to see how we can support you.