Hedge funds and soap manufacturers
There are now approximately 14,000 hedge funds in the marketplace. To say that things have gotten a little cluttered is an understatement. This represents a challenge to both managers and institutional investors: how does an investor decide which long/short equity manager to allocate to? And at the same time how does that manager get themselves noticed?
Murano Systems works to meet this challenge head on. The London-based firm (with offices in Stamford, Connecticut) is essentially an ‘enabler’; a disintermediary that sits directly between investors and managers to help both parties make a relevant connection. By asking questions that are specific to its fund clients, Murano is helping to not only improve the quality of sales pipelines – and ideally AuM – but also help investors cut through the swathe of manager talent when looking to allocate capital.
“It’s becoming a bit of a nightmare for institutions whose job it is to invest in these funds. Managers need to better understand where investors are coming from and what they are looking for,” comments Ole Rollag (pictured), Managing Principal at Murano Systems.
Roughly half of Murano’s business is done in the US, whilst approximately 30 per cent is done in Europe and 20 per cent in the Middle East and Asia Pacific. The team speaks to small family offices all the way up to large sovereign wealth funds “and everything in between” says Rollag.
So what are investors looking for? How are they navigating this minefield of thousands of managers?
According to Rollag, de-correlation is an important consideration among other things.
“Investors want managers that can bring diversification and help dampen the volatility in their portfolio. If I’m an investor and I think Europe is going to perform better than the US, I might move my allocation to Europe accordingly and try to find the best manager. If I’m bullish on Europe I’m going to want a punchy manager, someone who will use more leverage. Conversely, I might be bearish on Europe and require a more conservative manager. It depends on the investor and the scenario.
“Another factor that investors look at is asset growth year-on-year. Some investors will naturally piggyback on other investors if they can see that a fund’s AuM has grown year-on-year. It’s a herd mentality. One of the problems for managers, however, is that performance and track record might be excellent but they haven’t enjoyed any asset growth. Investors will naturally ask: “What’s wrong with you? Why haven’t you raised more assets if you’re so good?”
“We’ve seen managers that have stayed at USD20mn for years.”
This is an interesting point and the subject of one of Rollag’s blogs back in April this year entitled ‘The difference between a good fund manager and a successful one’. Rollag writes the following: “One business developer that I worked with told me that: 2/3rds the success of any fund was sales. As a manager, my initial reaction was, “my performance is what is driving your sales effort, my underperformance will also kill any reason for selling my product”.”
Oftentimes, when a hedge fund folds it isn’t because the strategy was wrong, or returns were poor; it’s because the AuM component of the business failed. As Rollag states:
“Fund AuM times management fee plus performance fee equals profit. If you’re not good on the AuM component, why bother?” Rollag goes on to say that the sales versus manager argument is “probably 80 per cent sales, 20 per cent manager talent. There is a difference between being a good manager and being a successful one. The successful ones grow their business while performing.”
Murano is re-addressing this imbalance, this lack of sales focus that can stymie a manager’s growth. Clients that use the system receive reports throughout the week from Murano that detail who the investor is that they’ve spoken to and why they are a good fit for the manager. An esoteric manager might receive one or two reports a week, a long/short equity manager maybe five or six reports, whilst a long-only manager might receive 10 or more reports a week.
“If we are all doing our job correctly, every 10 or 15 reports that a manager receives should result in a second meeting with the investor,” says Rollag.
This, of course, by no means guarantees that the manager will be successful at raising new assets. Getting an institutional ticket is no easier than getting a film script optioned by a Hollywood studio but at least the manager knows that the investor reports they get from Murano are highly screened and highly qualified. Then it’s down to the prowess of the manager and their investor relations team to sell the fund and strike the deal.
Asset management is a tough industry. Running a successful fund and delivering returns whilst at the same time managing and growing the business from an AuM perspective is very hard and something that seldom few achieve. London-based Lansdowne Partners are a great example of a fund that, on day one, clearly separated these two important functions; they’ve since gone on to become one of the world’s leading hedge fund businesses.
For the majority of managers, their focus is understandably skewed towards building the track record, locking in performance. The AuM growth element tends to get overlooked.
“I sometimes compare the hedge fund industry to a soap manufacturer. People focus on buying the best materials, the best machines and forget about the need to buy the trucks, how they are going to wrap the soap, who they are going to sell it to and so on. They may manufacture lots of top quality soap but they become nothing more than a warehouse.
“A fund manager analyses companies all day long so it’s slightly paradoxical. They judge companies on how well they are run, their earnings potential – but they seldom apply that same scrutiny to their own business,” says Rollag.
Nowadays, hedge fund managers are no longer unique. Even if a manager has an amazing reputation they are being compared to numerous other managers with equally amazing reputations. The whole culture of secrecy has largely disappeared. They have to be transparent because if an investor doesn’t understand the strategy, or how much risk is being taken, they will not and cannot invest.
“We are lucky to sit right in the middle and attempt to understand both the investor and the manager. There was a derivatives fund that we met recently. They refused to explain how they made money, even the very basics. Since I come from a derivatives trading background, they could walk me through it and not worry about being too technical. After the meeting, I start to ask myself, “If I can’t understand how they make money then how will they ever be able raise assets from investors? The first rule I learned at the Chicago Board of Trade was “Never trade an instrument you don’t fully understand”. Most investors are no different. They are held accountable, as well.”
“When giving presentations managers have to focus on the top two or three points that they want investors to go away remembering. People focus on getting meetings but I read somewhere that only 22 per cent are followed up on to see how they did. Why bother having the meeting in the first place?”
What Murano is doing is helping managers change the way they sell the fund. This is not the traditional ‘door-to-door selling a vacuum cleaner’ model.
“You need to make it more consultative by having the investor come to you. We are helping to change that dynamic by listening to the investor. It’s about building empathy with the client. Investors like us because we put the time in to understanding them and help connect them with the most relevant fund managers,” explains Rollag.
One new solution that Murano is developing is called the Chromic Reverse Solicitation Process (US Pat. Pending) to help investors access managers outside of the scope of the AIFMD in Europe but which, crucially, may comply with reverse solicitation rules under the directive.
“The way we’ve defined reverse solicitation is that it is an act of free will on behalf of the investor to contact a fund manager. With Chromic, at the end of a conversation with us an investor can click on a button to get more information on a manager (based on a fund or funds whose details potentially match what they are looking for). When they click on that button an email is sent from the investor to the manager to send them more information.”
This means there is a clear paper trail whereby a manager can show that the investor actively contacted them and not vice-versa. Investors may also use Chromic when they need to make a tender.
“We place a lot of value in our reports and want our work to be as high quality as possible. We want to help managers and investors have good, worthwhile meetings. We recommend that managers get in contact within 48 hours to follow up and all being well, set up a face-to-face meeting with the investor. Our hit rate (in terms of first meetings) is roughly 50 per cent,” says Rollag.
It’s time for managers to stop being product warehouses and freshen up their sales approach.
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