By Diane Harrison
As we head into the tail end of Q1 2012, an interesting conundrum has been rearing its head since this time last year. While a common theme in both 2011 and 2012 has been that the alternative industry has been growing in terms of investor interest and that investors are examining the benefits offered by these non-correlated investment options as a means of mitigating the performance and risk-based issues present in today’s equity and bond markets, the reality is that allocations have been scarce as hen’s teeth. Only a select few alternative managers, mostly large and well-known, have been reaping the rewards of this heightened interest.
Fund managers give voice to their frustration over not having success in raising capital for their funds, while allocators and investors cry out for alternative means to divert their assets from the nonperformance of traditional asset classes. “Where are the options to invest my underperforming funds?” appeals the latter, while the former vents with “I’ve had solid performance, my risk controls are tight, my operational infrastructure is in place, and I have demonstrated my abilities in the strategy for years.” So why not the connection—what is the issue for these two entities who purportedly are seeking out each other diligently?
The easy answer would be that the two parties are failing to intersect—that the managers who are working hard to build their funds and gain new investors are missing the mark in terms of their marketing efforts: they aren’t following through with prospects, are failing altogether in reaching out to the right categories of investors suited to their style and strategy, or aren’t being responsive enough to the information requests that prospects are asking of them.
Were that the case, the solution would be relatively simple. Improve your targeting efforts, tighten up your process of relationship-building with receptive prospects, and make sure you have the metrics in place to deliver the types and levels of detail and data required by today’s discriminating investor. All of these suggestions come at the problem from a tactical standpoint but, unfortunately, fail to address the essential cause, which is more elemental in nature.
As a marketing strategist and consultant, I have had both the pleasure and the frustration of interacting and working with both parties to this conundrum, and believe I have developed some measure of insight into the issue at large. While the tactical issues mentioned above are certainly essential in creating the information bridge between manager and investor that is critical to the relationship, a less-apparent issue holding each other back from the “getting to yes” point is more rooted on the side of the investor.
A key difference between the two parties lays in the way each side views capital. A fund manager has multiple investment goals and objectives to factor and weigh as he conducts his business, which at the core is investment management. He must evaluate a myriad of issues as he executes his strategy, not the least of which include liquidity, risk management, position sizing, and trade identification and execution, all while adhering to his style and stated investment objectives.
A manager assesses and weighs multiple factors as he operates within his strategy, making the most informed decisions possible and adjusting to a globally-challenged market environment to the best of his abilities. He operates with conviction—sometimes more strong than at other times—but he does the best he can with a dynamic market situation and lives by his skill at executing that conviction.
An investor, with very few exceptions, operates with a balanced view towards preserving capital while achieving some measure of return. The risk/reward profile varies for each, but always includes a component of protection. In seeking to partner with an investment manager, most investors are highly concerned with the ability of each manager prospect to convey this downside protection component in their discussion of investment strategy. The investor needs to be convinced that every manager to whom they allocate money will be working to preserve their capital first before focusing on building the investment to greater heights.
In short, the investor is looking for clarity of purpose in their manager prospect. “Are you on the same page with me in terms of protecting the downside? Will you be focused on keeping what I’ve given you before committing my capital to a direction that will be at risk?” This is not to imply that the investor doesn’t understand the general purpose and goal of making an alternative investment allocation. It’s more about the investor psychology that compels the decision-making process for both investors and managers.
Managers focus on making decisions with . They want to feel as comfortable with their decision as possible before committing to a new cause. Change is uncomfortable in many areas, not the least of which is in allocation redeployment.
Additionally, managers are paid to make investment decisions. Their stated objective in investment management is to be managing capital consistently in line with a strategy for which they are paid. Investors have no such compunction to be active in the markets. They have varied investment goals and objectives, but are not generally focused on being actively present in the markets at all times. They are, however, keenly focused on wealth preservation. Their primary investment drivers may include legacy planning, charitable funding, and other personal goals, but all require a focus on downside protection from erosion of capital.
In essence, this essential difference in the way each side views investing may be at the heart of why it takes such effort and so long to bridge the gap between managers and investors in allocating capital. They aren’t working at cross purposes, but at times it feels like they are communicating with each other from across this conviction versus clarity divide. Managers who find the means to see the issue from the investor side of the table will see a much deeper relationship develop with potential partners to their cause.
Diane Harrison is principal and owner of Panegyric Marketing, a marketing communications firm founded in 2002 and specializing in a wide range of strategy and writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line.