Many emerging managers and hedge fund startups mistakenly believe that just because they have a great strategy investors will eventually flock to their hedge fund. Hedge fund investors like to see that you have a strong hedge fund business model and that you are of institutional quality. In the following video, I provide some tips and strategies for getting your hedge fund ocean-ready.
Video Transcript/Summary: The strategies and tips provided within this video module include:
If you go out to meet investors too quickly, you could do a lot of damage to your hedge fund.
Some funds are too eager to raise capital and present their fund at a point when the fund is not yet at 100% and you risk losing that investor forever.
You want to have all your marketing materials and your investment strategy prepared and well-polished.
It’s ideal to have a lot of investors and consultants that will give you some advice early on in your fund’s lifetime and many managers try to launch so fast that they have not developed these relationships.
Transcript for Ocean-Ready Hedge Fund Business Model
Hello, this is Richard Wilson and today I’m going to talk to you from here in Nice, France about making your hedge fund business seaworthy or ocean-ready. Well, I’ve been learning more about sailing in these past few years while raising capital and working in a hedge fund industry. And I think one truth about a hedge fund industry is that if you launch your hedge too quickly and you go out and meet with investors too quickly and too many different types of investors too quickly, you’re going to get recorded in different institutional databases as being unprofessional, as not having a clear investment process. You’re going to do a lot of damage.
I even spoke with somebody at the game 2011 conference last week about this. And they said that they only represent and they only raise capital for fund managers within in their first 6 months of launching their fund, because otherwise they’ve probably already done so much damage for themselves in the industry, that’s a waste of their time but you can work with them. I think that’s a little bit extreme but I think the advice goes along with what I’m trying to tell you right now is that when you’re sailing in a bay as many sailboats do here around Nice, you can have some things that aren’t totally working well in your boat.
Your rigs cannot be set up right, your ropes could be loose, maybe a couple of your sails are in bad shape, maybe the things on the walls of your sailboat inside the boat aren’t really secured. But if you go out in the ocean you really need to be kind of sea-ready or ocean-ready or seaworthy. In other words, if you get in a storm or if you go over a bunch of swells you don’t want things flying around inside the cabin of your boat. If you need to have your main sail work because your engine dies, you really need that main sail to work. You can’t really rely upon, you got a coast guard in the bay that he’d come, tow you over 50 feet to your dock. It’s much more serious when you’re out in the ocean.
So it’s really a great analogy for running, starting and growing your hedge fund because before you go out and meet with very important investors, you don’t or you have a great relationship with, you really want to have everything walked down and in place. You want to have your marketing materials, kind of in grade A shape, institutional quality, everything that you’ve shown an investor you want to have looked at 5 times by people in your team, do the fifth draft, have it compliance approved. If somebody is going to ask you for a standard DDQ or a question that comes in a standard DDQ you should be able to answer within one business day, not a week or two.
Everything you do in your business should be well-polished by the time you’re meeting with new investors. Hopefully when you launch your fund you’re able to balance ideas off of consultants, advisors, service providers and some investors you already have good relationships with, then that’s how you get the important feedback and really figure out what’s your checklist, what’s those 20 or 30 things that you are kind of seaworthy before you go out and start meeting with investors face-to-face about your fund.
And this is something that I think is a common mistake to make. People want to get out there and raise capital really quickly, you know speed an implementation, just get out there and meet with investors and get great feedback, but really you need to be very cognizant of the fact that if you do that too early and too fast, you’re really going to hurt yourself and you could sink your boat very on in the process, whereas if you just take that first valuable piece of the feedback from your investors, really use it, implement it, and evolve your fund at higher levels before taking it out to 300 different investors, you’re going to be much better off in the long run.
So I hope you enjoyed this video. It’s Richard Wilson coming to you from Nice, France and we’ll see you again soon.
Before you go out and try to meet with investors to present your fund it is important that you have your hedge fund business model well-established and storm-tested so that it can stand up to inspections by hedge fund investors.
In the following video, I explain what types of investors that hedge funds pursue, why they target these investors, how that changes as a hedge fund’s assets under management increases and why it is important that you understand this concept if you are in the hedge fund industry, looking to raise capital or starting a hedge fund.
Video Transcript/Summary: The strategies and tips provided within this video module include:
If you are a hedge fund that manages $100,000 to $10 million then you are really limited in what investors you can target.
At this small of a size, you should look to hedge fund seeders, friends and family, and small wealth management firms.
The next group is $10 million to $100 million. There is a small percentage of institutional investors and fund of funds that will consider hedge funds of this size.
At this level, your sweet spot is wealth management firms, high-net-worth individuals, seed capital providers and small family offices.
Once you reach the $100 million+ AUM level you are “institutional-quality” and you have many more doors open to you in capital raising.
When you get to this level you can market your hedge fund to family offices, institutional investors, wealth management firms, etc.
At $1 billion all doors are open and your concerns will likely shift to performance, business management, risk management and other non-AUM aspects of your hedge fund.
Transcript of Hedge Fund Investors:
Hello, this is Richard Wilson and welcome to this short video on Hedge Fund Investors. In this video I’m going to explain to you what types of investors hedge funds go after, why they focus on those types, how that totally changes as the hedge fund moves from a $1M to $30M to a $100M to a billion dollars plus, and why it’s really important to understand this concept if you’re working in the hedge fund industry, looking to raise capital or running your own hedge fund.
Surprisingly a few people in the industry go through formal hedge fund training and that is why lots of people can work in the industry for years without knowing some of these basic facts about how it operates. Now to start with, let’s look at the bottom of the pyramid. If you’re a hedge fund that has $100K to $10M in capital under management within your hedge fund there is very limited number of investors you can go after. And before I even start to label any of these please know that all of these types of investors are generalizations. The type of investors that you can go after in your country, in your state for you to have a hedge fund could be different.
So these are general guidelines, what types of investors hedge funds typically go after. It’s not set in stone and don’t take any action with hedge marketing or capital raising till you’ve spoken with somebody in your compliance department or an attorney that’s an expert on these issues. But now if you’re a hedge fund that manages a $100K to $10M in capital pretty much have limited options in the front of you. You can go after friends and family, small wealth management firms or some hedge fund seeders or fund to fund that seed small startup hedge fund managers or emerging managers as they’re called.
Really your options are limited here because people don’t trust that you’re going to be in business a year or two from now. They don’t trust that you have a talented team typically, that you don’t have a long enough track record, that your business really isn’t set up yet or profitable enough yet to survive long-term.
The second group here is $10M to $100M in assets. And these are often referred as emerging managers still and there’s a small percentage of “institutional investors” that will look at emerging managers. A very small percentage of institutional consultants, a very small percentage of fund to funds, some family offices and then your sweet spot in this range is really going after wealth management firms, very small family offices, high net worth individuals in a compliance approved way. Again, seed capital providers and really what you’re looking for here is people who want to take the bet on the manager which is not large yet. They don’t have hundreds and millions of dollars in capital but they can see your growth, they can see you’ve reinvested in your business, they see that you’re going in a good direction.
The next level up is when you get to $100M or more. This is when you start to be referred to as institutional quality. Many times up to $100M you’ll be called an emerging manager and many people if you’ll call them, they will almost, just hanging up right in your face if don’t have a $100M in capital or more because you’re not “institutional” enough for them. And this can get very frustrating to say the least for anyone trying to raise capital and many of you probably know exactly what I’m talking about. But when you get to this level, it opens a lot of doors for raising more capital. Do know that some institutional investors will still call you an emerging manager until you get to $250M or even $500M or more. But typically 80% of the market is calling you an institutional manager after you get to a $100M.
Now, when you get to this level you can market yourself to family offices full on to institutional consultants in most cases, to some pensions and foundations and endowments but many will require you to have those higher asset levels. And the top of the pyramid here is when you get to a billion dollars plus. I really have not heard of many allocations if any that require more than a billion dollars in capital. Even insurance plans, pension funds, endowments, foundations, ultra high net worths, the biggest single-family offices in the world — typically if you have a billion dollars that’s a sustainable business plus some.
And it’s really about the institutional quality of your risk management procedures, the consistency of your invest process, the team you have in place. It’s more about everything else going on in your business rather than asset level at that point. Once you get past $500M, $800M, a billion dollars, the AUM issue instead of being the number one roadblock in your hedge business really is just a detail and it’s the other parts of your business that become center stage.
So I hope this short summary of what types of investors exists in the hedge fund marketing, who you can go after, what stages, who hedge fund managers are raising capital firm right now today at these different levels is very helpful and educational for you. Thanks and please join us again soon. It’s Richard Wilson and keep in touch. An important part of raising capital for your hedge fund is recognizing the different types of investors. I hope that this video has given you a clear idea of where your hedge fund generally fits in and what investors you should be targeting. (As always, please note that these investor types are generalizations and only serve as guidelines and do not take any action without speaking with a compliance officer or attorney who is an expert in this area.)
This video covers the basics of how to move from being a trader or portfolio manager to running a hedge fund business. If you are doing research on hedge fund formation you are in the right place. We explore how to start a hedge fund, what service providers you need to work with, the hedge fund formation process and how much it costs to get started. These are important considerations that you should take into account before you start a hedge fund.
Video Transcript/Summary: The strategies and tips provided within this video module include:
A recent study found that over 50% of hedge fund failures were due to business and operational reasons, not poor performance.
To help prepare for this before you start your hedge fund I highly recommend that you complete a business template and complete a full business plan for your hedge fund including: marketing, operations, hiring practices, mission, goals and your growth strategy.
A business plan will prepare you for hedge fund due diligence questionnaires as well as putting you on the path to efficiently start a hedge fund.
Putting in place formal hiring contracts can help you get through the hiring process more easily. Be sure to take advantage of less expensive or even free resources for the legal documents you need, such as Legal Zoom.
If you are about to start a hedge fund, I recommend seeking the services of an attorney with experience in fund formation.
Be sure to use some tool to organize your plan for starting a hedge fund.
Keep in mind the five best practices for starting a hedge fund that are provided in the video.
Transcript of Hedge Fund Formation:
Hello, this is Richard Wilson and today we’ll be talking about hedge fund startups, investment fund startups and emerging managers. Specifically we’re going to talk about common mistakes made by them but then also some marketing and sales best practices which should help you if you are an emerging manger.
A statistic came out in 2005 showing that over 50% of hedge fund failures were due to business and operational reasons and not due to poor performance. I think most people outside the industry and most investors don’t realize that, and having the sound business is not only something that investors are starting to scrutinize more but it’s also something that if you’re running a fund obviously it should be one of your top concerns since it’s the number one reason for funds failing in the past.
To help mitigate some of the risks of running your business as an investment fund there are a few things you can do. One, what I highly recommend is that you download a business plan template and complete a full business plan for your hedge fund. This should include your marketing, operations, hiring practices, your commission, your goals and your gross strategy as your firm expands. If you meet with institutional consultants as your fund grows, they’ll ask the types of questions that should be included in this business plan. So really complete a really solid business plan. It’s going to help you complete due diligence questionnaires and help you complete due diligence phone calls down the road.
Next, we definitely recommend putting some formal hiring and contract templates in place for your firm. You should meet with an attorney or there are some websites that provide kind of a template based legal contracts if you’re looking for something simple such as an employer contract or a confidentiality contract. Legalzoom.com has a whole bunch of free resources that we have used in the past and it can lower your overall legal cost. If you do have something such as a fund formation that you’re looking at doing, so if they’re more complicated or if you want a hedge fund attorney to review something that you’re gotten from a website, such as this, you could go to our service provider directory.
The biggest one we have is on hedgefundblogger.com. If you go to Service Provider Directory, go down to Hedge Fund Attorney. Here are two attorneys that you could meet with or speak to over the phone, Bilal Malik and Brent Gillett. I’ve met with both in person and referred over 50 funds to them in the past and I’ve never gotten any negative feedback at all from professionals that worked with them. So I highly suggest meeting with an attorney if you’re forming a fund, if you just formed a fund, if you haven’t yet, you should get their advice. It could save you much more money than you spend in a long run.
Next, to mitigate your business risk further in a running a fund, I suggest using some sort of business process analysis tool or mind-mapping tool. If you’re not familiar with this, it’s very simple. Here’s an example of one. Here’s our website that we’re launching, fund marketing tools. And you see, you can organize one idea and then you have child ideas that come off of that. So for your hedge fund business, you could manage the different parts of your business and make it visual for either the management team of every one in your firm exactly what you’re spending your time on, what different resources your firm must constantly be building, what types of expertise your building, perhaps what types of processes you’re working on or getting them in place. This can be a really good visual tool for your firm to use.
If you want to create one of these for yourself it is free to use. The website bubbl.us and it can very easily — I can show you real quick here. Once you log in and create your own account, you choose start a new sheet and after you start a new one, it’s very simple. You start with one central idea and then you just grow it from there and you can expand and describe your whole business here very quickly. So here in the middle we’re going to put, say Wilson Capital Management. Okay. Now, this might be a business plan for yourself, just a visualization for yourself in managing your fund. Next here, you could put Marketing and Sales. And down here you could put Employee and Team Management. Over here you could put Portfolio Management.
And you could see within each of these areas that there might be 5 or 6 tasks that you’re having to complete, either every day or over the next quarter for Marketing and Sales, you might decide just for planning purposes that you want to break this up. And you might allocate equal amounts of time to these three different types of marketing. Make marketing the high net worth individuals, marketing to family and friends and then perhaps marketing to local and financial advisers. Usually I like to make it with their different level. I like to make them some sort of different colors, it makes it easier to read.
But you can see here you can manage your whole business and within just 20-30 minutes of using this website you can have everything very visually laid out. It makes it easy to train somebody new and makes it easy to see what challenges or tasks you have in front of you and it makes sure that you keep a 10,000-foot view of your business so that you don’t forget that on top of managing the portfolio and trying to raise capital, you’re also running the business and there needs to be formal business processes in place so that you can manage those and improve those over time.
Okay, so now onto some marketing and sales best practices. Most hedge funds do start with marketing to friends and family. They look at co-workers, they look at people that have known them for 10-20 years and they know they’re trading abilities, they know their portfolio management abilities. This is the way that most people initially raise capital. By Friends this can mean past co-workers or peers in the industry that you know. Many times traders will help fund other traders who go out and start their own funds. Another form of raising capital is financial advisers, going after financial advisers that have high net worth individuals as clients can be an effective way especially locally if you can meet face to face to raise capital.
And then the next step beyond that would be meeting with wealth management firms. And we create a little bubble here for that, but meeting with larger wealth management firms that have many clients with high net worth status that could possibly invest in your fund. And as your fund grows in size then you can kind of move down the totem pole or move up the totem pole I guess to a more sophisticated less retail investors up through wealth management, to family offices, institutional consultants, pension funds, endowments and foundations.
One thing to remember and a common mistake that I see a lot of hedge fund startups making, is they describe their strategy as well-diversified, uncorrelated with the general markets. They have a very in depth experienced team. The problem with that is that professionals like myself and especially investors will probably get twice the number of hedge fund marketing materials than I do. I see the same thing over and over again and everybody looks the same. So the trick is to come up with a unique selling proposition and not just a selling proposition. And to make it truly unique, you need to figure out exactly why you did start your fund, what skills you guys have on your team that combines and create something unique or what unique insight or strategic information advantage your firm has over all of your competitors because if it doesn’t look unique, then it probably won’t get read at all.
I recently gave a speech in Florida on hedge fund marketing best practices and this was at a Mark Seven’s conference in Boca Raton and during that conference or during that speech, I went over the 5 best practices that hedge funds can use to market their fund. One of them here is the materials that focus on the 4 factors of hedge fund marketing. So what I suggest here is that the 4 most important things on marketing are pedigree, building your team to a high quality, highly experienced team unique to your business process and the product you’re offering, getting your presentation quality up, so having a professional logo, having professional marketing materials, having an investment process that is described in a way that presents a unique selling proposition and not just a selling proposition.
And then the last thing obviously is managing portfolio risk and having that track record of managing risks within your portfolio over the long-term. So I really think that those are the 4 things that investors really look for most: Pedigree, Presentation Quality, Process and a Unique Selling Proposition for you to buy that investment process and then Portfolio Risk Management.
So that pretty much wraps up our talk today on hedge fund startups and if you’re looking for more information on starting a hedge fund or a running a small investment fund, please see hedgefundstartupguru.com.
Hedge fund formation and starting a hedge fund can be an intimidating and difficult process. I hope that this video helps you navigate through the steps you need to take to start a hedge fund.
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