Institutional money has become a more significant source of funding for hedge funds in recent years, requiring managers to rethink their investor relations and marketing processes - including the tools they use to communicate. And, as sophisticated investors demand more in the way of risk transparency, technological advances can help overcome the obstacles inherent in communicating a clear, reliable and accurate message to hedge fund investors.
According to a report from Ernst & Young:
Managers are more likely to point to recent performance than are investors. Investors are more likely to point to transparency of portfolio holdings and performance attribution than are managers.
The dichotomy is significant, and hedge fund managers are beginning to take notice. Forward thinkers like Cliff Asness of AQR have long promoted a more transparent approach - one which, albeit perhaps less glamorous, dramatically increases the value of a hedge fund as an investment vehicle, particular to the sophisticated institutional investor.
The investor relations differences are staggering. Unlike the high net worth individuals for whom the hedge fund vehicle was initially conceived, institutional investors are necessarily in the business themselves. Consequently, they understand the risks of different types of investment strategy. They will know to ask the duration and yield of a bond portfolio; they will know to ask for betas (and perhaps even more advanced risk statistics) on an equity book.
The only thing better than being able to answer their phone calls intelligently is actually providing them access to some real-time - but curated - source of summary risk analytics. This makes the investor experience substantially more engaging, and to the risk-averse fund of funds manager, the benefits of the increased transparency are tangible. After all, they are able to more efficiently manager their allocations to funds providing some form of transparency - why wouldn't they put more capital there?
There are three main tenets to our approach:
- The manager controls the transparency level - that might mean putting a 1-hour delay in the wire, or only choosing basic, aggregated analytics
- Investors can breathe easy - the analytics chosen must allow the investor some level of comfort during times of turmoil that the manager is on the case and aware of the risk exposures
- Managers should comment as much as possible - our software has built-in real-time commenting, and we encourage managers to make short (Twitter-style) notes on market activity as it transpires
Indeed, in their 2011 Investor Report on Hedge Funds, Prequin Global sums up the benefits of a semi-transparent approach:
While institutional clients do demand more developed processes on the fund administration side, the benefits they bring can be invaluable. Their long-term investment horizons and ability to invest substantial sums of capital make them an excellent investment partner - far less likely to redeem capital at the first sign of
We believe that enhanced communication combined with powerful technology can help hedge funds compete for assets with an 800lb gorilla. This unique value proposition to an institutional investor can provide boutique shops with a new sort of appeal - something that differentiates them from their largest competitors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.