Thoughts

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.

Living Inside the Box

Posted by Anu Heda on Jul 19, 2011, in Thoughts , tagged with ,

Large corporate culture conditions us (in the American business community) to strive for “thinking outside-the-box.”  When was the last time you were brought into a conference room and told, “Ok, we’re going to think outside-the-box?”  My money is on this happening to you at least once in 2011.  There’s nothing inherently wrong with outside-the-box.  It speaks to some desire for differentiating a product, service, or process.  In marketing initiatives, there’s often a desire to have out-of-the-box communications.

Through recent FA and institutional investor interviews, I’m learning the value for investment managers to communicate inside-the-box.  Consider the box as strategy, asset class, or categorization a fund (or fund family) is matched to.

Repeatedly, I hear advisors and institutional investors match strategy with fund family when discussing investment selection.  A frequent (and immediately delivered) comment sounds like this, “Well, for intermediate bond I’ll put a client in Pimco Total Return.  For equity exposure to the Pacific, I allocate to the Vanguard Pacific ETF.”  That’s not to say Vanguard or Pimco are dominant or superior to other providers.  What I ascertain is that those firms have defined their expertise in intermediate bond strategies and the Pacific Rim, respectively.  So much so, many advisors simplify their practices by matching those funds to those categories,

Perhaps this is a straightforward approach to consider.

  • Define your fund box – communicate how your clients should categorize your fund
  • Clarify how this box is important – answer (to all  prospects) why anyone should care about this box
  • Build a reputation – work day and night to communicate why your fund is great inside that box

Obviously this is easy to speak about and difficult to execute.  But with small steps and consistent input, you could evolve your target audience’s thinking to put your fund “inside-the-box” and hopefully keep it there.

This process (I use that loosely) seems to have worked for Warren  Buffet who defined his box as value investing (specifically the Graham and Dodd investing models), spoke for decades about the enduring principles of value investing, and then built his reputation as the world’s leader.

One message is better than ten

Posted by Anu Heda on Jul 18, 2011, in Thoughts , tagged with

In recent Sales-oriented work, we’re reminded of how important and difficult it is to create a compelling message; especially if delivering in person.  In our experience, that delivery is more effective and enthusiastic with one compelling message instead of ten so-so messages.

Everyone wants to create compelling messages, no doubt.  Creating the “best” message and starting with a pen and blank paper (or finger and iPad) can feel futile.  And we find that because this is so difficult, a common next step is to create as many maybe messages as possible.  Think of a maybe message as something that may interest some, may be believed internally by some, and may create some skepticism.  A generic maybe message could be: We are the global leader of providing thought leadership on credit default swaps.

  • Maybe someone finds that interesting.
  • Maybe half the people internally believe that.
  • Maybe numerous colleagues, clients, & prospects raise an eyebrow.

Often a message like the above is crammed in with other similar ones.

I’d suggest that Sales & Marketing are better off creating one great message and support points.   That may make delivery much more effective.  Imagine an introductory sales meeting with an unqualified lead that started with: “I’m only here to tell you one thing.”

I know, I know – the devil is in the details.  But we’re here to help.

Nuances Related to Women Investors

Posted by Anu Heda on Jul 01, 2011, in Thoughts

Last Thursday, I attended the Private Asset Management breakfast here in New York.  The events are always a treasure-trove of insights and topics related to the challenges facing family offices and trust managers.

The breakfast conveyed a panel to discuss women investors.  The eloquent panelists rattled off numerous data points, statistics, and anecdotes.  Of all that, two points still stick with me a week later.

  1. In their experiences, women are more apt to learn in groups.  The panelists all relayed stories about how women preferred meeting in person and when possible, meeting in groups of  women with similar issues and needs.  There was a desire to understand the relevant topics and terms.  Group settings were somewhere between sufficient and preferred.
  2. Women wanted their heirs to be more knowledgeable than they were in their own youth.  The panelists relayed the difficulties of preparing presentations and discussions for the heirs, often in their 20s – uninterested in long-term planning, and hoping for the best (i.e., no parental deaths in the near-future, optimistic views on  dividing the estate, etc.).

Neither point is Earth shattering, but valuable considerations when developing value-added programs, pitch books, and Sales strategies.

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.