RHalo carried out a survey of hedge fund managers and their investors globally in the first half of 2016. The objective was to measure overall levels of satisfaction with the investor relations process, and in particular to see how effectively fund managers were engaging investors.
Altogether, 109 investors and 126 fund managers took part in the research. The views of 12 service providers were also canvassed, which add an additional layer of objective analysis.
The IR function within hedge funds is sometimes ill-defined, frequently being taken on by personnel with other duties, and covering a multitude of roles. Only the COO function is more abused. A significant portion of the industry still seeks to struggle through with no dedicated IR staff or resources.
By contrast, investor expectations of hedge funds remain high, and frequently unfulfilled. Emphasis from investors is on what fund managers are telling them, not how frequently they report. Fund managers also remain largely unaware of the degree to which online newsflow is used for investor research, both positive and negative.
Investor satisfaction with communication levels
Investors are not completely satisfied with the levels of communication they receive from the hedge fund managers they invest with. No investors who participated in the survey were ‘Very Satisfied’, and it is the overall quality of information which they are most critical of – 12% of investors claimed to be‘Very Dissatisfied’ with the information they are receiving. Given the number of investors who participated, this demonstrates that the hedge funds sector needs to provide not only more data, but better data.
Where can communication content and information quality be improved?
The natural follow-on question is where can hedge fund managers improve? Allocators were asked to assess fund manager communications across a range of criteria: while managers seem to be meeting investor expectations in terms of reporting on holdings and allocation details, there are still some critical weak points.
Foremost among these is the lack of knowledge of peers: given that an effective comparison against peers in the market might actually benefit managers’ ability to differentiate and promote their funds more effectively (rather than simply referring to industry benchmarks or stock market indices), this is surprising. Presentations are not being updated frequently enough, with almost half of investors regarding this as ‘Low Quality’. As hedge fund managers are forced to process more information, it is becoming more difficult and time consuming for them to keep their materials up to date using purely manual processes. This also points to a lack of use of existing, cost effective technology to introduce a higher level of automation within the production process for presentations and fact sheets.
Finally, some investors expressed frustration at the volume of unsolicited communications from managers they are not invested with, which often has the opposite effect to that intended.
Preferred frequency of updates
Three quarters of investors said they would prefer to receive detailed updates from fund managers on a quarterly basis, with another 25% preferring monthly updates.
Preferred format of updates to investors
Investors were asked their opinion on the format in which they preferred to receive fund manager reporting – the majority stated either newsletters/factsheets or email as their most preferable format. Group conference calls rank a distant third. Interestingly, investors are less keen on video reports at this time.
Overall, investors still feel hedge fund managers are falling short of expectations in the investor communications stakes, particularly in the quality of the information they were receiving. 28% said they were unhappy with information received, and another 35% were ambiguous. The only area where some investors said they were satisfied was with the frequency of updates.
One respondent said that hedge fundIR teams “need to make it easier for investors to assimilate info-rmation. We are bombarded by emails and calls, and anything to make it easier for us would be great.”
“We don’t appreciate large documents and presentations,” commented another.
Quality of fund manager websites
Fund managers need to invest in their websites, however. Investors are not at all happy with the quality of fund managers’ web presence, leading one investor to comment: “A Google search and a website visit are the first two things done when hearing from a new manager. If there is no website, or it’s not informative, [the manager] needs to work much harder to keep my interest”.
The vast majority of investors said they were either ‘Somewhat Dissatisfied’ (42%) or ‘Very Dissatisfied’ (28%) by the quality of the websites of the fund managers they were invested with, or thinking of investing with. Most importantly, all investors (100%) who responded to this survey said they used hedge fund managers’ websites as a source of information.
Investors were also asked to judge hedge fund managers’ websites by both usefulness and content. None were able to proclaim themselves even ‘Somewhat Satisfied’. They were most critical on the overall usefulness of fund managers’ websites – a striking 66% of allocators said they were ‘Very Dissatisfied’ in this respect.
Usage of news and media for research and ongoing monitoring
Investors are regular users of news media for their fund manager research purposes: two thirds of investors stated they consult the internet or news media for information on hedge fund managers ‘Extremely Often’ or ‘Very Often’. This highlights the importance for managers of being aware of and contributing to the newsflow, or at the very least, being conscious of what is being said about them and their employees online.
Qualitative information on funds/managers
Following on from this, it was also interesting to note that 27% of investors said that they would be ‘Extremely Responsive’ to additional qualitative information on hedge fund managers, for example panel discussions, webinars, or interviews with the media. A further 25% said they would be ‘Somewhat Responsive.’ This further highlights an appetite from investors for more information on fund managers.
Ranking funds against their peers
Given the lack of knowledge displayed by managers about their peers – either the funds of most similar strategy and style, or those most likely to be competing for similar investor mandates – we specifically asked investors to rate hedge fund managers on their awareness of their peers. This feedback supported earlier findings – no investors believed fund managers carry out or report peer analysis ‘Extremely’ or ‘Very Well’, while only a quarter of investors considered that hedge funds understood their peers ‘Somewhat Well’.
IR teams appear to be missing an opportunity to capitalise on their fund’s competitive edge against other firms, and differentiate themselves from managers against which they may be routinely compared. A manager’s lack of knowledge of how they are assessed and compared by allocators, and against whom, will continue to be a major handicap.
Need for improvement: lack of detail and clarity
So where do IR teams within hedge funds need to improve? According to the investors surveyed, managers can improve the amount and quality of information about their strategy and manager’s style.There remains a serious communications gap when it comes to conveying investment strategy information to investors. Every investor interviewed for this study identified this area as one where improvement is urgently needed. There is an obvious reluctance by hedge fund managers to circulate too much detail on their intellectual capital, particularly as it can be hard to control or limit how materials might be disseminated beyond the immediate prospect or client.
IR teams also need to focus on how exactly they are communicating their ideas and key selling points to the investor community, as clarity of communication is also an issue for over 60% of investors interviewed.
Many allocators still pronounce themselves as confused about what managers are trying to tell them which undoubtedly introduces delays in their decision to invest, or terminates their interest. Given the competition for investor capital within the hedge fund industry, those managers who are best able to clearly articulate their strategy, style and differentiating properties in a meaningful way to investors will benefit most from their interaction with allocators.
FUND MANAGER FEEDBACK
Frequency of communication with investors
Hedge fund managers generally communicate with investors on a monthly basis – at least, 64% of those taking part in this research do. While this contrasts with the quarterly preference of most investors mentioned above, managers are clearly keen to provide their clients with information and updates on their investment.
Relevancy of communication
The IRHalo survey also asked hedge fund managers to help paint a picture of their ideal investor report based on relevancy. Here the highest relevancy was attached to the key service providers, an indication that managers consider their choice of service provider to be critical in building investor confidence. Providing detailed manager’s commentary, and having presentations up to date also featured highly in the managers’ priorities. Of least relevance – from the list of options given to them – was details of holdings, which none felt were ‘Extremely Relevant’, although 37% of managers said this was ‘Very Relevant’, and this disparity is likely due to different reporting priorities across different strategies.
Currently, hedge funds rely heavily on email and regular manager reports to keep investors up to date. Websites are used as a secondary tool only. However, note that hedge funds are split between roughly a third who are active users of their websites as reporting tools, compared with the remainder who don’t recognise their importance.
Where do hedge funds feel they need to improve?
Of course, hedge funds are most open to ways in which they can identify and engage new investment prospects. Following that, most managers see the need to improve in a range of areas. Although only a minority actively make use of their website as an IR tool, around 70% would like to invest more time and money in it.
Hedge fund manager websites can become a lot more sophisticated, for example integrating with secure IR platforms, allowing clients to extract more up to date information via a secure online interface.
Other areas where IR teams would like to enhance their capabilities include the production of newsletters and the way in which they process and monitor client data. The development of tailored CRM systems that can easily integrate with the communications requirements of specific industries is becoming an area of emphasis across a wide range of industries, with communications teams demanding CRMs that recognise the unique requirements of their market, and which can integrate with other software platforms. IR teams seem to be aware they are spending too much time grappling with manual data processes, when they could be spending more time researching the investor market.
Managers were also asked about their level of awareness of other funds with similar strategy and style to themselves, and those funds most likely to compete with them for investors’ capital. Here we have somewhat of a bell curve result, with only 15% of managers considering themselves ‘Extremely Aware’ of which funds constitute their closest peers in the eyes of investors. This differs from our findings with investors, who feel that manager knowledge of peers is significantly less than that.
By contrast, 38% of managers said they were ‘Somewhat Aware.’ It is clear that IR teams will need to be doing more work if they are to properly differentiate their funds from their peer base – being aware of who competitors are is an important first step. This is in stark contrast with the opinions held by investors, where 58% of allocators were critical of managers’ knowledge of their peers and competitors.
One explanation of this disparity is that managers may have incorrectly identified their peers, and this error is interpreted by investors as a manager’s lack of awareness.
Use of third party advisors for IR support
Currently, two thirds of fund managers do not use third party firms to support their investor relations, including investor research and capital introduction services. Another 28% only draw on these services on an occasional basis.
Importance of the IR function to hedge funds
Just how critical is the IR function to hedge fund firms? Only 12% of the managers who responded said they did not have an IR function or felt they did not require one. By contrast, well over half the surveyed managers consider it be either ‘Extremely Important’ or ‘Very Important.’
Numbers of dedicated IR personnel in hedge funds
The majority of firms that responded (60%) said they do not currently retain dedicated IR personnel – the function is either part of another role, or shared between employees. This is surprising considering the number of managers claiming the importance of the IR function to their firm.
A quarter of respondents only have one dedicated IR specialist. Larger funds will tend to employ more – for example one respondent had an IR team of 20. This would be expected for very big institutional managers, or those that are distributing hedge funds in retail wrappers.
A dozen service providers also took part in the survey. Here, we were interested in any observations they might have about the quality of IR in the hedge funds industry. They were split roughly equally between those who serviced investors, and those who serviced managers. It is significant that a quarter of these felt that fund managers were not good at addressing the communications and information requirements of investors. Only one service provider thought hedge funds were consistently meeting expectations. When asked about the areas of improvement where hedge funds would benefit especially, investor research ranked as the top category, with technology support coming a close second. By contrast, only 25% thought further staff resources or training would be of value to the hedge funds they worked with. One service provider commented that managers needed to focus on keeping their communications simple and easy to read/digest. There continues to be a lack of clarity in much of the IR output from fund managers.
Following the recent AIMA guide to investor relations, this survey is timely in that it highlights where there remain some gaps in the IR process for hedge funds. We feel this falls into two broad themes.
Firstly, hedge fund managers remain less engaged with the opportunities offered by media relations and the internet. In many cases, this is due to confusion about what they are permitted to say and do, sometimes the result of cautious advice from legal advisors. But it is significant that the opportunities to develop websites that can be smoothly integrated into the CRM and IR process, acting as a reporting and audit platform, are being missed. In addition, managers continue to be unaware of the degree to which search engines are employed by investors as research and due diligence tools, and the opportunity that exists to utilise various content streams to meet this appetite for information.
Secondly, managers have some work to do to meet the information requirements of investors. There is a need for materials to be concise and legible, but also for the information that is presented to bring improved metrics, and proper peer identification and analysis.
Certainly, an opportunity exists for smaller and / or growing funds to improve their competitiveness via an enhanced IR function. With most investor relations being undertaken on a part time basis or by only one individual, it seems critical that hedge funds address the operational issues this presents – e.g. the lack of updates to investor materials.