New research now offers a unique road map for all emerging and start-up hedge fund managers as they make their way to USD1 billion AUM. This has been achieved by analysing the path to growth and crucial insights of larger, more established managers who blazed a trail in building billion-dollar hedge fund businesses.
Produced by the Alternative Investment Management Association (AIMA), alternative prime broker GPP and Edgefolio, ‘Making it Big’ is informed through an industry-wide survey and a series of roundtable discussions posed to asset managers and industry allocators representing an estimated USD500 billion in total hedge fund AUM.
The research identifies six key factors for emerging managers to focus on when growing their businesses:
Deploy an effective marketing strategy
• Funds managing between USD500 million and USD1 billion sourced none of their latest investments from third party marketers, instead using their own personal networks and existing client referrals.
• Funds managing between USD100-USD500 million and those managing over USD1 billion all hire an in-house marketing specialist.
• Of critical importance to investors was meeting a fund’s key founding partners and portfolio manager, and maintaining that access during and after the investment process.
Identify opportunities to punch above your weight
• Funds that successfully surpass the USD100 million AUM barrier open themselves up to a greater field of opportunities to receive capital investment, and the array of allocators who can invest in them increases.
• 29 per cent of firms in the USD100-USD500 million AUM value range have used seed capital in their flagship fund.
Align investor and manager interests
• 100 per cent of allocator responses said it was essential that managers invest their own money in the fund.
• Managers running funds with less than USD100 million held on average 7 per cent of their funds’ assets. Those with more than USD1 billion under management were shown to hold on average 4.6 per cent.
Devise a fee structure to grow a healthy fund
• Managers and investors alike understand the importance of management fees to the day-to-day running of a fund and to cover costs. As such, they have remained relatively stable or have slightly increased for the majority of strategies.
• Managers and investors are demonstrating their willingness to work with various structures to better align with investor demands.
• Funds with smaller AUM may sustain greater pressure on management fees, but once a fund surpasses the USD500 million AUM mark the fund has greater agency to set management fee levels.
Underwrite the business for the immediate future
• The possibility for a fund to breakeven with USD86 million AUM was a unique finding of last year’s ‘Alive and Kicking’ research. This overall average figure remains relatively static at USD85 million in the new results.
• USD1 billion-plus AUM managers revealed this increases alongside AUM growth to around USD180 m AUM.
• USD1 billion-plus AUM managers highlighted the importance of having enough working capital to support two to three years of sub-scale AUM.
Know when to build a permanent team
• The COO function appeared to be an inherently important internal role during the launch and growth phases, being the least outsourced by all sizes of fund.
• Once funds breach the USD500 million AUM mark, the roles of Chief Legal and Compliance officers are brought back in-house.
Background to survey sample:
Hedge fund representation includes responses from 155 managers: the emerging manager group making up 65 per cent of the total, and the remainder coming from managers of funds with over USD500 million AUM. This included those managers who run funds over USD1 billion AUM. Crucially, the research also reflects the opinions of 60 hedge fund allocators, accounting for approximately USD85 billion.
Over 70 per cent of manager respondents surveyed fall into the big six categories of investment strategies: equity long/short, global macro, fixed income credit, CTA/managed futures, event driven and multi-strategy. The remainder make up niche strategies including FX volatility, private credit, life insurance, crypto currency, structured credit and various risk premia.
Jack Inglis (pictured), AIMA CEO, says: “This road map for the aspiring billion-dollar fund manager is an invaluable resource. It reveals the importance of effective marketing, aligning your business with your investors and maintaining efficient working capital levels.”
“This work, produced in partnership with GPP and Edgefolio, offers a series of digestible, takeaway lessons that funds can use now or keep in mind for the future.”
Sean Capstick, Head of Prime Brokerage, GPP, says: “The hedge fund industry has enjoyed rude health over the past year with strong performance driving allocator confidence despite a pervasive narrative of investor–driven fee pressure. Our research reveals it is still possible to launch a hedge fund and be successful in this climate, but there is a lot more that emerging managers can do to grow AUM.”
“Key to ‘Making it Big’ is a flexible fee structure and strong marketing strategy. While the smallest managers are happy to offer fee reductions in exchange for significant investments, emerging managers are generally and understandably reluctant to forego fess. Increasingly we are seeing more innovative structures that place greater focus on performance fees rather than management fees, ensuring greater alignment of interests with allocators and increasing confidence in new managers. Negotiating on a greater and more bespoke range of fee options may help to land important investors at a critical stage of a fund’s growth.”
“Contributing to a substantial marketing resource is often a chicken and egg scenario for smaller managers, who may find they cannot justify the in-house expertise that larger competitors wouldn’t go without. There are a number of outsourcing options for smaller managers that recognise the importance of marketing to business growth, but many should consider hiring this experience internally at an earlier stage to ensure they can reach and exceed critical mass.”
