Author: Mike McLaughlin

One Day of Hedge Fund Discussion, Two Takeaways

Posted by Mike McLaughlin on Jul 26, 2011, in Thoughts , tagged with , , ,

Last month I presented at an Ivy Plus hedge fund event. The discussion throughout the day was spirited, and two issues in particular stood out to me. Without further ado:

1. First-Loss Capital is Controversial

We all know it’s a tough market for smaller hedge funds looking to raise capital. With a lot of smart, ambitious investment minds out there trying to jumpstart funds, it makes sense that first-loss capital continues to grow as a tool for increasing AUM.

But is all of this a good idea for the hedge fund and its limited partners? I’d characterize the Ivy Plus attendees as somewhere between “dubious” and “morally outraged”.

I’m tempted to argue this is all one big gray area. After all these are legitimate, if risky, funding deals willingly entered into by the hedge fund. But there is one issue that raises red flags – as Santangel’s Review points out, first-loss deals introduce a potentially severe short-term bias to the hedge fund.

It is this variable that I think (a) invites managers to stray from their strategies, (b) presents a potential blindside risk to limited partners, and (c) ultimately undermines the fund’s stability. I understand why funds consider first-loss capital, but I’m not optimistic that the impact of its current incarnation will be positive for the hedge fund industry.

2. The Pitfalls of High Fixed Costs

One of my favorite investing axioms is “when a company builds a shiny new headquarters, it’s time to short their stock.”

This idea came to mind as Merlin Securities presented takeaways from their latest whitepaper on operating a successful hedge fund. The biggest mistake hedge funds make? Inflating fixed costs by overinvesting in people, office space, and technology.

In other words, hedge funds are no different than many other businesses. You can check out the full Merlin paper for a basic reminder that no business can thrive when its expenses outpace its revenue.

Making Passwords Easier to Remember

Posted by Mike McLaughlin on Jun 27, 2011, in Thoughts , tagged with , , , ,

A few months back, a Yahoo user posed a simple question:

How many online passwords do you have? How often do you forget the damn things?

The best answer, as selected by the asker: Too many and all the time.

This reality remains one of the consistently frustrating parts of Web strategy. In trying to deliver better online experiences for advisors and institutions, asset managers face a logic puzzle that can be summed up by three statements:

  • Clients want more personalized Web sites.
  • Firms can increasingly deliver more tailored experiences IF clients register and login.
  • Clients resist registering and logging in.

Over the years firms have tried hard to overcome clients’ resistance. Registration processes have been streamlined. Sites like Oppenheimer’s sell reasons why the user should sign up. But the password challenge lingers – the average person has more than 20 passwords to remember.

The industry hasn’t dug deep to find better solutions. Right now a forgotten password typically kicks off a multi-step process requiring:

  • A phone call, OR
  • The issuance of a temporary password via e-mail, followed by specification of a permanent password, OR
  • Both

It seems very few firms are actively exploring opportunities to make the tracking/recall of passwords easier. Embedding “hint” questions in the registration process and using those to facilitate direct recall of passwords is one option. Enabling users to utilize the login credentials they know best – via OpenID-based services from Google and Yahoo, for example – is another.

The point is – for all the work done to make it easier and more attractive to sign up for sites, less work is being done to make it easier to repeatedly log in time and time again. With all that firms have done to create excellent sites, this is a challenge that warrants more attention.

Advisors’ Use of Fund Firms: What’s the Truth?

Posted by Mike McLaughlin on Jun 22, 2011, in Thoughts , tagged with , , , , ,

Last week Cerulli Associates released a study built from a survey of over 1,800 advisors. As chronicled in Ignites (subscription), a key finding focuses on how advisors are using fewer mutual fund providers and “…the importance of cementing solid relationships to secure preferred provider status…”. A snippet of the relevant data:

  • 57% of advisors use 5 fund firms or less, up from 37% in 2009
  • 13% of advisors use 15 fund firms or more, down from 25% in 2008

The idea of concentrated mutual fund family usage has been increasingly trumpeted over the past few years. And I have no doubt that the data is reported accurately based on advisors’ responses. But I am dubious of the idea that so many advisors use so few fund firms. Two reasons why:

  • The first-hand knowledge we have of our clients’ data shows it’s common for firms to have huge numbers of small, single-product advisor relationships.

  • Many firms prioritize cross-selling over pure prospecting. Sales strategy and comp plans are frequently driven by the desire to build deeper, multi-product advisor relationships. Highly-concentrated assets among advisors, as indicated by the survey data, would seemingly dictate a greater focus on new client acquisition.

So what does this mean? Two takeaways:

  • Beware Self-Reported Data: I think it’s human nature to neglect the “long tail” of small positions within clients’ portfolios. There may be 5 primary firms used by advisors, but not 5 total.
  • Beware Aggregated Data: The survey is cross-channel and includes advisors with an average AUM of $50M. But fund firms typically have a more targeted, specific strategy than that. It’s important to isolate the subset of comprehensive data that is relevant and draw conclusions from there.

We’ve been involved in enough syndicated research to know that the data gathered always leaves room for interpretation. The findings here fit the bill.

When an Advisor Calls, Who (or What) Answers?

Posted by Mike McLaughlin on May 16, 2011, in Thoughts , tagged with , , ,

The other day I heard a radio ad for a company promoting green technology. Most of the ad wasn’t memorable – I don’t even recall the name of the company – but the ending stuck with me. The firm gave out their toll-free number and then stated that “a live person will pick up your call”. No automated system (IVR). No menu to navigate.

I thought that sounded pretty good.

I then wondered: do any asset managers have a live person answering their toll-free phone numbers for advisors? So I called ten firms to find out. The results:

  • One firm, Nuveen, has a sales rep pick up directly.
  • Another, Columbia, has an IVR say your call is important before patching the advisor through to a rep.
  • Three others – BlackRock, Delaware, Janus – prompt first for an extension then have the advisor hold for a rep.
  • The remaining five firms present an automated menu with anywhere from 2-6 options.

In other words, half the sample enabled an advisor to reach a human being without proactively doing anything besides placing the call. Yet only Nuveen has that call directly answered by a person. I can’t claim that this makes Nuveen’s customer service any better, or that they do a better job of converting cold inbound calls to sales. But I do think the direct personal interaction is, simply, nicer. And, evidently, rare.

(As a sidebar, the configuration of the different IVR systems is worth another discussion down the road. The options vary significantly by number/type. And, interestingly, two firms use their IVRs to promote specific products prior to presenting a menu of options.)