Institutional Assets

Raising assets in today's marketplace

Originally published in the March 2008 issue

The international capital flows associated with today's global marketplace have created tremendous fund raising opportunities for hedge fund managers who can adapt to the needs of global institutions. Managers who have succeeded in raising capital from 'friends and family' and who are now seeking additional sources of capital must develop an understanding of needs and the nuances of global institutional investors. Despite record levels of institutional investment in hedge funds worldwide, the marketplace has an estimated 10,000 hedge funds, giving institutional investors plenty of managers to choose from. Being a successful investment manager with strong performance is often not enough to ensure institutional investor participation. Managers must also have the ability to express their differentiation and value-added in a convincing way to rise above the 'noise' of the global marketplace.

Managers who have developed their original asset base with high net worth assets very often need to re-tool their approach to capture assets from the broader institutional community (ie. pension funds, insurance companies, foundations/endowments and consultants). The need for this re-tooling is based upon the nature of larger institutional investors and the methodology they use in their decision to hire new managers. High net worth investors often base manager hiring decisions on referrals from trusted industry contacts and their decision making can occur within a small group of experts who can make decisions quickly.
However, larger institutional investors, who have traditionally used a time-tested process for hiring long only managers, may require the positive opinion of an investment consultant as well as a favourable vote by a large internal investment group or committee.

A more pro-active kind of investor
Additionally, managers who seek institutional investors also need to recognise that, while their original high net worth investors were generally more passive in terms of their interest in the fund's operations, institutions are more inclined to want greater details in terms of the fund's investment process, underlying positions and potential risks. Many institutions view their relationships with their underlying managers as a partnership with shared information. Frequent communication, transparency of the investment process as well as positions and risk reports from prime brokers and/or third party risk aggregators may be required to satisfy an institutional investor.
Based upon the unique requirements of institutional investors globally and their potential need for information and partnership, how should a manager re-tool his or her approach? A few key thoughts:

Check all the boxes
The term 'institutional quality fund' generally applies to those managers who represent all or most of the following attributes: an established and high quality track record, a stable asset base, an on-going market opportunity for the fund's strategy, a repeatable investment process, a stable and experienced investment team, a high quality risk management process throughout the investment process, proper reporting with appropriate amount of transparency and a robust back office. A manager should make sure these elements are not only present within their organisation but also clearly demonstrate this to their prospective institutional investors.

Introduce key team members
Institutions are less inclined to invest with a fund which is dominated by one individual and more likely to look for experienced teams with clear roles and synergies. Institutions generally hold the pedigree of the individuals (top schools and top firms) in high regard as well as the teamwork they sense from group meetings. During investor presentations key team members should play a significant role and backgrounds should be highlighted both verbally and in printed materials. Team members should also be encouraged to develop their own relationships with institutional personnel. For example, the fund's risk manager should seek out the investor's risk professional if applicable.

Emphasise differentiation
Institutional investors will generally look at multiple managers within a strategy area in an effort to find the 'best of breed'. Managers must clearly demonstrate a differentiation and 'edge' in their presentations and materials. Managers must also develop an understanding of the other significant players in their strategy space and be able to articulate the qualities which ensure superiority. It's best to keep this list of differentiators short but persuasive.

Become a problem solver
In many cases, institutions are not simply looking for a talented manager in a certain strategy to add to their portfolio. It is more likely that they are interested in solving a problem or issue that they have regarding a need for a certain type of investment return. For example, an insurance company may want to have an uncorrelated return with a current income stream to more fully match their liabilities. A manager will do well to develop a good understanding of an institutional prospect's needs through an interactive Q&A process before presenting the attributes of his or her fund.

Alignment with Blue Chip managers
Foreign hedge fund investors often need the sense of security of investing with well established hedge fund management companies. These Blue Chip manager names often carry a higher premium among foreign investors than in the US. A newer manager will thus need to demonstrate an alignment between him or herself and a big name fund in the same strategy. This can be done by identifying team members with similar pedigree or similar firm investment processes.

Understand differing regional investment criteria
Institutional investors outside the United States can have differing criteria when judging a manager. For example, investors in emerging market countries often need to diversify away emerging market risk within their portfolios. Sensitivity to these strategy criteria is critical for effective asset gathering. Additionally, managers must be cognisant of the various regulatory authorities in the regions in which they are attempting to raise assets. Managers looking to sharpen their institutional pitch and rise above the noise may find it useful to use the services of some of the highly qualified placement agents, third party marketers and/or consultants in the industry.

The high quality service providers can help managers find highly qualified institutional prospects worldwide and help re-package a manager's message, allowing that manager to focus on what they do best: make money for their clients.

Tom Kreitler is Principal at CP Eaton Partners, responsible for raising institutional assets for hedge fund managers. Prior to joining the firm, he was a Managing Director and Institutional Sales Manager for US Treasury and Agency debt andderivative products at JP Morgan. Kreitler holds a Bachelor of Arts in economics from Colgate University and a Masters in Business Administration with a finance concentration from Boston College. He serves on a number of charitable boards, including Habitat for Humanity of Greater Bridgeport and Operation Hope of Fairfield.