The evolution of hedge fund capital introduction events
By Don Steinbrugge (pictured), Agecroft Partners – Hedge fund capital introduction events, in which investors and fund managers meet in a speed-dating environment, have increased in popularity within the past decade.
These events allow participating allocators to review the details of a large number of fund managers, and select a subset of those they would like to meet in a brief one-on-one meeting or group roundtable setting. These can be either intro or update meetings. These capital introduction events are an efficient way for investors to quickly complete initial due diligence on a large scale. They also allow managers to gauge investor interest in their strategy from a diverse group of allocators.
Capital introduction conferences and teams were originated by prominent investment banks in the late-90’s as a way of differentiating their firm from competitors in order to attract new hedge fund clients. Many of the services rendered by these banks’ prime brokerage units are fairly commoditised. The quality of a prime broker’s capital introduction team’s services and conferences became a primary factor for hedge funds in selecting a prime broker.
Hedge funds are highly profitable businesses for investment banks through securities lending and trading, along with other services. The securities lending industry continues to be inefficiently priced, allowing for high profit margins, mainly due to the lack of a centralised marketplace that would enhance competitive pricing.
When prime brokers select managers to participate in their cap intro events, their evaluation process typically includes a combination of the quality of the fund and how profitable the manager is to the prime broker. This also can negatively affect the diversity of strategies represented at these events, resulting in a high concentration of long short managers, which typically generate the most revenue for the prime broker.
No such thing as a free lunch: While hedge fund managers do not pay an outright fee for prime brokerage cap intro events, their attendance comes with an underlying expectation that the manager will execute more business with the respective prime broker after participating in the event. Although free for the hedge fund organisation, the ultimate cost is potentially paid by the investor through higher expenses incurred by the hedge fund, reducing net performance.
Many of these prime brokerage cap intro events are very high quality and worthy of investor participation, as long as investors understand the possibility of structural conflicts of interests.
Over the past decade, new competitors have entered the marketplace not associated with prime brokerage firms. These independent event facilitators have a revenue model in which they charge fund managers a flat fee to participate in the event while offering complimentary participation for investors/allocators. These events have grown in size and popularity for both managers and investors for several reasons, including:
High quality hedge fund participation. Since hedge funds have to pay a fee to attend out of their own operating budget, only those that believe there is a good chance of raising capital tend to participate.
A broader selection of strategies tend to participate in these private events compared to prime brokerage cap intro events. Specifically, this includes many managers with strategies that do not have a need for most prime brokerage services
Several independent cap intro events include a philanthropic component, in which they donate a large percentage of generated profits to charitable organisations. For investors, it becomes an efficient way to not only conduct due diligence and source new managers, but also to benefit charitable causes at the same time.
Over the past 12 months, due to Covid 19, these events have shifted the landscape, from primarily regional, in-person conferences, to global virtual events. These virtual events lose some of the benefits of in-person meetings and networking opportunities, however they are a highly efficient use of time and money.
Below, we have included survey results from the upcoming Gaining the Edge - Global Virtual Cap Intro event to benefit at-risk youth taking place from 26 April to 7 May. It is one of the largest virtual cap intro events in the industry. The survey results demonstrate the diversity of strategies offered by independent cap intro events and also more accurately reflect the strategy interests of the average hedge fund investor. The event has also seen more private equity oriented strategies participate as the lines between private equity and hedge funds blur by investors causing increased demand.
We expect both prime brokerage and independent cap intro events to continue to be popular with both alternative investment managers and investors. While in-person conferences will likely return in 2022, it is still unclear how many people will attend, due to Covid-19 vaccines being approximately 90 per cent effective and over 25 per cent of the population being reluctant to get the vaccine. Regardless of the success of in-person conferences, virtual conferences will be a permanent part of the industry going forward.