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Alternative Asset Managers Feeling the Burn

December 17, 2015

By Diane Harrison

As another year draws to a close, emerging hedge fund managers wrestle with how to grow their business to the next level, including how to survive another year of cutthroat competition for attracting investors. While the answers to this riddle can be numerous and complex, I thought it might be interesting to survey a cross section of hedge fund professionals on just one question: What would be your top priority in budgeting working capital for emerging managers who need to spend wisely in 2016?  Below are the most popular answers.

INFRASTRUCTURE: This includes hiring the right service providers and core team members from the outset. Investors want to see solid investment and operational processes at every level of AUM, so the capital allocation to infrastructure is essential to long-term growth opportunities for all managers.

DISTRIBUTION CHANNELS: This means having the access and expertise in business development present either within the firm or through third party representation, but also means targeting the right investor base relative to the firm’s size and strategy. Too many emerging managers begin their sales efforts at the institutional level, despite their asset base being too small to attract this audience, and precious working capital is lost in the first year or two.

STAFFING: Identifying key talent and timing the acquisition of these individuals are critical to long-term success. Most of the time, managers will need to consider giving up some equity in the firm to this core team. Research, compliance, and operations are essential functions that must be right from the outset of a fund launch.

CONTROLS: This pertains to risk management and compliance issues. Besides the investment management due diligence focus on risk, investors are also concerned with the regulatory environment, which is getting more complex for funds at all levels. This requires managers to be on top of the latest requirements for data management, reporting, and operations regardless of asset size.

TRANSPARENCY: Communication and reporting are quickly becoming mandatory requirements of managers for all categories of investors. With an expanding universe of third party administrators and specialty fund analytics businesses, managers with virtually no operations staff can still achieve a robust level of transparency from Day One. In addition to providing both flexible and customizable reports, savvy managers are also making themselves available through a range of online media, such as webcasts and podcasts, allowing investors to forge a connection to the portfolio manager.

ADVISORY SUPPORT: Being an expert in the markets is de rigueur for hedge fund managers; becoming an expert in business management is fast becoming a necessity for long-term growth. As most portfolio managers do not possess these skills inherently, they must seek to add the required skills through key hires and through external sources. External resources that can assist in this effort include an advisory board comprising the skills sets required but lacking in the firm. Most managers have connections from their previous working experience to assemble a solid advisory group, but many of these managers have yet to do so.

2016 will undoubtedly pose challenges for managers and investors across the board. Beyond the market-related issues facing both these groups is the internal battle that smaller managers wage to keep their operations running at a high level while delivering investment value and attracting new investors. By spending their precious capital wisely in these key areas, emerging managers may just get a leg up on some of the 10,000 funds present in the hedge fund universe today.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 25 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. In 2015, Panegyric Marketing received AI's Business Excellence in Strategy & Positioning Statements - USA | Best Financial Services Marketing & Communications Firm | Innovation in Asset Strategy | M&A's Excellence in Financial Services Marketing - USA | Best in Financial Services Marketing - USA | Wealth & Finance International's Excellence in Thought Leadership – USA.

A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line.