hedgeweekLIVE North America: “A level playing field” – Pandemic brings challenges and opportunities for start-ups’ fundraising efforts

Global downturn

The concluding session at this year’s hedgeweekLIVE North America digital summit focused on the fundraising challenges – and opportunities – faced by start-up hedge funds, with speakers tackling what moderator Aaron Steinberg, director, prime Services at BNY Mellon-Pershing, described as the “Covid-19-sized gorilla in the room”.

The ongoing coronavirus crisis has upended the entire marketing process for hedge funds this year, which carries huge implications for emerging managers building their businesses.

Panel discussion 6: The Fund Raising Process

Jeff Willardson, managing director and partner at PAAMCO Prisma, spoke of the huge practical obstacles arising from the pandemic, adding he could not remember a more challenging time during his 20-plus year career.

Panellists indicated that throughout the lockdown, most investors have focused predominantly on existing allocations and relationships established pre-Covid-19.

Describing how he has become “more discerning” in the meetings he takes, Willardson said the most recent investment decisions his firm has made has been to “re-up” allocations with existing managers it already knows well.

The discussion also heard how the proliferation of online meetings software have helped managers maintain communications with clients. But Eli Combs, founder of Axis Global Advisory, underlined how in-person meetings remain a core part of the capital-raising process, helping build rapport with potential new investors.

“You could never get an allocation without [that rapport],” Combs explained.

He outlined the traditional fundraising route, involving managers setting out their initial value proposition, followed by in-person meetings at investors’ offices and operational due diligence meetings at the manager’s office. This was often followed by transatlantic meetings before the summer to help secure further European allocations.

“What’s different right now is that you cannot even have that first meeting,” Combs said of the present environment.

Nonetheless, while emerging hedge funds have traditionally struggled to compete with large established firms deploying sizable marketing efforts led by experienced sales teams, the session heard how the coronavirus lockdown has the potential to be an effective equaliser, offering fledgling firms the opportunity to get in front of investors that they otherwise might not have been able to.

“Now the playing field is levelled because nobody is going out meeting”, Combs said.

Wayne Yu, CEO & CIO at BCK Capital Management LP, acknowledged the difficulties in closing deals with investors and allocators because of the lack of face-to-face meetings.

“But that doesn’t mean you cannot build a lot of dialogue,” Yu told the panel.

The importance of manager experience and track record was also highlighted, and how it can help strengthen long-term partnerships with investors. Speakers also explored how emerging managers should approach marketing efforts, with Yu noting how marketing remains a “very different skillset” to portfolio management.

Mani Mahjouri, CEO, Blueshift, said start-up funds need to figure out what part of their message resonates with prospective investors.

“From a quant perspective, we are at a disadvantage. If you are a discretionary trader you can walk someone a through a trade, and go through it piece-by-piece. But in a quant strategy you are basically laying out the formula,” Mahjouri said.

“You have to think about other ways and tactics when developing a mutual understanding.”

Rounding off the session, Yu stressed that emerging managers now need to better explain to potential investors what their strengths are and how they are different from other firms.

Building on this point, Eli Combs suggested most new hedge fund managers do not have an understanding of the size and scope of the hedge fund investor universe, pointing to between 2000-3000 potential investors, with start-up firms competing with “a thousand other managers who are also good at what they do.” 

“You need to be very thoughtful about how you are differentiated from other managers,” Combs added.

Mani Mahjouri said: “This is an arduous path, it’s challenging, and this can be a difficult business. But it’s also a rewarding business as well.”