Thought Leadership Content

LESSONS FOR ALTERNATIVE INVESTMENT MANAGERS FROM GONE WITH THE WIND

Having been born on Lookout Mountain, Tennessee, I was raised on Southern folklore, literature and films. In particular, GONE WITH THE WIND has become something of a touchstone for life’s lessons. 

As I survey the current alternative investment landscape, we are closing the first act of Gone with the Wind. The Yankees have burned Atlanta, Tara has been occupied, there is no food, Pa’s gone crazy and Mother is dead. What better analogy for an alternative investment landscape that has essentially delivered poor performance on a relative and absolute basis for over a half dozen years, if not a decade? 

On top of that, there are too many mouths to feed: thousands of fund of funds, hundreds of third party marketers, a proliferation of advisors and consultants. When coupled with the backdrop of pension funding short-falls, fee compression and increased costs of regulatory compliance, the landscape looks barren and fraught with peril. 

An honest assessment of our landscape warrants “brains and courage” lest we “be winnowed out.”   Said another way, we in the alternative investment landscape need a period of Creative Destruction: doing away with old practices and looking for innovative solutions to our current state.  

And when you’ve got a problem, just like in marriage, you’d better start talking it out!

The hedge fund and private equity space has always been heavily shrouded in secrecy. Managers often site concerns over general solicitation, but in fact, it’s often attributable to laziness and arrogance. In periods of strong performance, managers think they don’t need to talk to their investors and constituents. In periods of poor performance, managers often abdicate direct engagement, thereby exacerbating withdrawals. Another approach for managers has been to rely on external story tellers: the third-party marketers. 

Let’s begin with the manager who wants to hire a third party marketer to solve his fund-raising and, sometimes, investor relations management, issues. I was recently told by a leading third-party marketer that his company has the definitive database of 16,000 hedge fund investors in the world, as though that were enough to build a business for someone else. Databases do not sell investment products. Guns-for-hire may be able to get someone to the table, but they will not keep them engaged and confident in the relationship through thick and thin. 

We know that managers must create a relationship with their investors. No one else can do it for them, and in fact, when the relationship foundation has been set by an external party, who goes away after raising the assets, those investors typically leave first. 

My theory is very simple. Third-party marketing rarely works, and it equates to managers abdicating their personal responsibility for building investor relationships. 

Managers have got to start talking it out, not just when in fund raising mode, but all the time. Here are my three rules for success in today’s environment. 

(1) Investors want to hear about opportunity. 

(2) Investors want to be educated. 

(3) Investors want, what I call, “consistent programmatic excitement.” 

Managers have to learn how to build a real communications and marketing team and implement a strategy. This is not done by third-party marketers, and it’s not done by junior guys pitching names from a database. 

Explaining and identifying opportunities for investors creates both excitement and engagement. Education creates inquiry. Consistency creates a relationship. I want to impress upon the reader that these are fundamental to the firm’s long term success and could even prove equally valuable in times of growth or tumult. 

Get visible. Create content. Stay engaged. Lest you “get winnowed out!”

 

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