This past September, the well-respected marketing firm, Peppercom, conducted in-depth research involving nearly 300 of the hedge fund industry’s largest firms, to measure how those funds are currently applying standard marketing tools and tactics, including websites, social media, the financial press and advertising, one year after the JOBS Act. Peppercom’s research paper begins with the statement that, “The private world of hedge funds is looking more like Madison Avenue.” But a close examination of the study’s findings suggests that this observation may be wishful thinking.
In terms of marketing sophistication, the hedge fund industry lags far behind all other financial and professional services, across every sub-category. Peppercom’s research shows that:
Despite the research study’s sugar-coating (for example, “mid-sized funds… are beginning to understand the importance of a website”), hedge fund resistance to marketing is unlikely to abate anytime soon. And there are both good and bad reasons why these sophisticated, deep-pocketed companies refuse to communicate externally in an effective, transparent manner:
Bad reason: misguided mystique
Many hedge funds embrace the notion that an opaque brand image creates a mystique that’s appealing to sophisticated and well-heeled investors and intermediaries. They believe common marketing practices will diminish their “private club” exclusivity. An Op Ed piece published recently on the Hedge Fund Marketing Alliance website sums up the prevailing attitude: “Online universities and community colleges advertise – Harvard and Yale do not.”
But increasingly, investors are demanding transparency. An Opalesque survey showed that 98% of more than 100 institutional investors, family offices and UHNW investors had declined to put money with at least one hedge fund manager because of transparency concerns. And a growing body of market research confirms the weak correlation between fund performance and investor contributions. So understanding of a firm’s investment process, rather than brand mystique, is at least as important as its track record as a driver of asset flows.
Good and bad reason: fear of visibility
Many funds believe marketing makes them more of a target for regulators. In a business where an SEC inquiry can send investors running for the exits, “out of sight/out of mind” appears to be a prudent risk management strategy. Many funds prefer to restrict market visibility, and even sacrifice potential asset growth, rather than put the firm’s reputation and entire business in jeopardy by raising its public profile.
Although their trepidation regarding visibility may be well founded, funds can gain some level of comfort knowing that regulators now publicly encourage market transparency. In October 2013, SEC chairwoman, Mary Jo White, stated that, “hedge fund managers feel they have a new freedom to communicate with the public, to advertise, to talk to reporters, to speak at conferences and, most importantly, communicate with investors openly and frankly. And, you can do these things without the fear of securities regulators knocking on your door, or your outside counsel screaming at you.”
My mother’s advice given decades ago to my two younger sisters regarding teenaged boys may also apply here. She warned them, “It’s always the quiet ones that you need to keep your eye on.” Based on a similar rationale, regulators may also be more likely to focus attention on funds that have very little to say about the nature of their business.
Good reason: marketing confusion
Regulators and marketers share equal responsibility for the widespread misunderstanding about what’s considered permissible and effective marketing for hedge funds. Regulators create incomprehensible rules of engagement, and marketers offer strategies and tactics that often have no connection with tangible business results, and that sometimes put funds at greater risk of violating fuzzy regulations.
Because of this confusion regarding the definition of a risk-averse and effective marketing strategy, many well-intentioned hedge funds that otherwise support the underlying notion of market transparency will pursue the path of least resistance. Most often, that means doing nothing.
Marketing essentials and potential pitfalls on the road to transparency
Changing their existing culture, addressing regulatory concerns and deciphering marketing propaganda are not easy tasks for hedge funds of any size. But to survive and prosper in a marketplace where transparency and trust are now valued by investors and promoted by regulators, hedge funds will be increasingly required to build a rational, risk-averse approach to external communication. Here is a roadmap designed to address that marketing challenge:
Build your brand strategy first. This internal discipline yields a unified view and clear expression of what your firm seeks to achieve for investors, how it addresses that goal, what makes it uniquely qualified to achieve that goal, and why investors should select and trust your firm. This articulation of the firm’s value proposition serves as the cornerstone of a written marketing plan that should include: tangible business goals, appropriate marketing strategies and tactics, calendarized activity, budgets and accountabilities. Any firm that operates without a formal plan (which should be simple, and not require a lengthy process to create), eventually becomes a victim of “trust me, it’s working” marketing.
Create a bona fide website, not a proxy. In an online world, websites are the mother ship of market transparency. If a hedge fund is unwilling to provide on its website essential information related to its capabilities and credibility, then the firm is not really serious about market communication. Ideally, your website should express institutional values, explain processes, showcase human capital, provide examples of thought leadership and include inherent third-party endorsements. It’s not a sales pitch or report card. Your website will generate investor interest by allowing visitors to draw their own conclusions about the firm and its potential to help them achieve their goals.
Leverage your firm’s intellectual capital. Thought leadership – which is overused marketing jargon – is a strategy that leverages knowledge and ideas to engage target audiences. Effective thought leadership can involve a broad range of marketing tactics, but should always be designed to achieve measurable business goals; not to simply have people think you’re smart. A hedge fund’s intellectual capital represents its most powerful market differentiator, and can be showcased without giving away any proprietary information or methodologies.
Harness the market reach of LinkedIn. LinkedIn has become an important due diligence tool for investors, intermediaries and the press. Most hedge funds understand this, and either provide a very basic firm profile, and/or allow its employees to post their personal profiles on LinkedIn. But to harness LinkedIn’s enormous market reach and professional clientele, hedge funds need to establish a buttoned-up institutional LinkedIn presence that’s consistent with the firm’s (bona fide) website; ensure that its employees’ profiles enhance the firm’s brand positioning; and take full advantage of appropriate user groups on LinkedIn to raise brand visibility and display its thought leadership.
Hold off on Twitter and other social media sites. Twitter can be a great information source, and most hedge funds should use it exclusively for that purpose: to listen rather than to speak. Twitter is a content beast that demands constant feeding, but few hedge funds have the time or social media sophistication to engage safely and consistently. Facebook is not an appropriate channel for hedge funds, and posting comments on independent blogs or online publications will not yield meaningful results.
Manage press exposure selectively. Beneficial media exposure can provide valuable brand credibility. But this is a high-risk tactic because reporters have agendas, can make mistakes, and are not in business to make your firm look good. However, hedge funds should proactively seek media exposure through participation in targeted editorial opportunities – such as bylined articles, op ed pieces and certain types of feature articles – that provide total or nearly complete control over what’s published. Although guest spots on financial news channels such as CNBC can fuel the ego, these are high-risk opportunities that most hedge funds should avoid.
Merchandise conference participation. Investor conferences are high-cost tactics that can be effective for hedge funds. But these events often yield low results because firms fail to properly re-purpose the related thought leadership they’ve produced, which can serve as raw material to influence target audiences that are much larger, and sometimes of higher value, than those in attendance at the conference. Doing all the heavy lifting (in terms of content preparation, travel, time away from office and home), but failing to benefit from that investment either before or after the event itself, represents a tangible opportunity loss.
Forget advertising for now, and perhaps forever. Regulators have not made it easy for hedge funds to understand the rules of the new advertising game, so the industry is better off encouraging the very large players – with deep compliance muscle – to be the first ones on the field. But there are more significant reasons why most hedge funds should never include advertising in their marketing plans. Notably, institutional advertising is expensive, it requires a long-term commitment, and, it is very difficult to measure or generate a market response. More importantly, at most hedge funds there is an extensive list of marketing strategies and tactics (for example, building an effective website) that should be addressed first, and that will provide a more meaningful return than advertising.
As market dynamics of the investment world drag hedge funds, however reluctantly, into the new era of transparency, there is some good news for those firms. Hedge funds have long demonstrated their ability to sustain a successful business enterprise without traditional marketing tactics. So any benefits that effective market communication might provide for them are very likely to result in incremental asset growth. Additionally, because hedge funds do not currently depend on marketing for survival, they can act in a deliberate, strategic manner. Hedge funds have the luxury of being able to design and implement their marketing programmes incrementally, and to focus on doing a limited number of things very well. In that regard, other vertical industries may eventually point to hedge funds as examples of best practices in branding and marketing. So perhaps hedge funds are not marketing Neanderthals. They are simply late bloomers.
Gordon G. Andrew has more than 30 years of experience in B2B marketing communications and public relations, with particular emphasis in financial services, healthcare, professional services, technology and business process outsourcing (BPO). He has represented a broad range of public and private companies, organizations, governments and individuals. His clients have included American Airlines, Bain & Company, Cornell University’s Johnson School of Business, The New York Stock Exchange, Sony USA, the government of Bolivia, Prudential Venture Capital, Lehman Brothers, First Investors Corp., and CAP Index.