Ole Rollag, the founder of Murano Systems, spoke to Hamlin Lovell, Contributing Editor of The Hedge Fund Journal, about their company and the hedge fund industry in general.
Hamlin Lovell: In a nutshell, what does Murano do?
Ole Rollag: Well, in a nutshell we’re quite simply a dating service – oftentimes considered like the anti-third-party marketer or something like that! Essentially, if you look at the world today there are roughly, we think, about 14,500 hedge funds and around 30,000 investors. The way people traditionally sell funds is very difficult and soul destroying. So if you’re a fund manager you have to make a lot of calls to investors. The problem is that this makes the buying process a headache from the allocator side because this sales process causes an endless flow of calls, emails, and meetings. And the world has become very inefficient in terms of the buying process. Murano essentially reverses the process. We chat with investors all over the world and ask them where they’re looking to allocate in the next three to six months. If it looks like one of our fund clients fits the allocator’s needs, then we’ll ask the fund client to introduce themselves to that allocator. In other words, we are reversing the sales process by listening to the investor. If we do a good job, then hopefully both the fund manager and the allocator will have a worthwhile conversation.
HL: Right. It seems in the past few years, the 800-pound gorillas of the hedge fund world have been getting fatter and fatter, while the small managers are really struggling to eke out a modest living. How can you help the small and new managers to raise assets?
OR: Well, one thing we found is that there is an investor for everyone. Oftentimes, smaller managers get the attention because it’s easier for them to produce alpha, and they work a lot harder for those returns. If you look at the investor population to say there are 100 investors, probably five to 10 of those will look at smaller managers. It’s just a question of finding out which investors would look at smaller funds.
HL: I see. And why do so few hedge funds use a CRM, customer relationship management system? And what are the benefits of CRM?
OR: It’s really interesting. The primary provider of client resource management software in asset management is Microsoft Excel; roughly 80% of the fund management industry uses it. This is very odd when a hedge funds can have 100s of relationships in what is now a large industry. Excel doesn’t tell the whole story. When was the last time you spoke to that investor? Where are you exactly in the process? And trying to track all these relationships on Excel has just become very, very difficult.
What’s interesting is that if you look at the CRM industry itself and the way businesses use them, CRM is used by “mom and pop” stores all the way to very, very large companies. But the industry itself, the hedge fund and also the long-only industry has been about 10, 15 years behind in many cases. Not only in CRM but also things like social media, understanding the client buying process and so forth.
HL: Right. Why is it important for all hedge funds to really differentiate their offering?
OR: If you look at hedge funds, they are basically like artists. They’re very, very good at doing one specific thing – masters of a craft. Many fund managers assume that other people will enjoy that craft and recognise that the manager is a master. The problem is that the manager rarely defines what benefit the client will get from the fund.
A fund is a product and needs to be defined as such. How is that product placed? How is the competition seen? Who is the competition? What are their unique selling points? What are yours? And we’ve seen a lot of fund managers enter into the market with a strategy and don’t really know what are the unique selling points (USPs). And so it’s one of the most important questions you can ever ask if you’re trying to build any business: what is my product? How does my product differentiate among thousands of others?
HL: When trying to differentiate a product, how long should a PowerPoint presentation be?
OR: Well, for a PowerPoint presentation, usually, we’d like to see about less than 20 slides to begin with. If you look at the buying process, you also have to go through the steps of what that process should look like. And so typically what happens is you phone the allocator up or you send an email requesting a meeting, and if somebody takes that meeting then they probably already have been through that presentation.
So the presentation is often like a CV. It has to be efficient, it has to be intriguing and it has to be relatively short. You’re basically just trying to get a meeting from that presentation. And then if the allocator wants more documentation, then obviously I’m sure that most managers have tons of documentation that they can send to the investor afterwards.
HL: And how important is performance in monitoring a fund?
OR: Performance is not as important as fund managers think. Performance is an output of skill and discipline. People forget that what you’re buying is the manager. One good example of this is if you look at the long/short space. There are, again, thousands ofmanagers in that space. If I’m looking at two managers that are relatively similar, but one person’s performance is slightly different, it’s very hard to decide whether that’s luck, or better risk controls, or whatever.
We have learned that many investors look for managers that have an interesting view of the world and are able to represent that view with clever asset allocation, good risk management and proper oversight. There are a lot of very mediocre funds that actually get good allocations, simply because they’re able to explain the story better. And we know of lots of funds that have great performance, but just don’t get placed because they fail to communicate AND tick all the boxes.
HL: I suppose performance and due diligence questionnaires are examples of hard criteria. But how about more soft criteria, such as cultural differences?
OR: One thing we tend to forget in asset management is proper client service and branding. Most of the hedge fund buyers are American, second to Europe. As we all know, funds are purchased and not sold. To this extent, business developers simply manage the process and need to be proactive in order to help the allocator make a decision.
It used to be back in the early 2000s and before, managers didn’t have to disclose very much and the sale was mostly about exclusivity and ‘snob appeal.’ Now, 14,500 funds later, if the service levels and the disclosures aren’t correct, then the investors will just kick the can down the street. At the end of the day, again, they’re buying confidence and long-term commitment. How the process is managed initially is an indication of how good that service is going to be.
By branding, I don’t only mean a cool logo and a nice looking presentation. Branding also goes into how you treat your service providers, how the phone is answered, how clients are greated when they come into the office, etc.
HL: And as an American with Norwegian ancestry, who has worked for French and Nordic banks, amongst others, what are the worst cultural and linguistic misunderstandings you’ve experienced?
OR: That’s a very tough question. Working for a French bank, it’s very hierarchical and things get done, but they get done in their own way. I think the most interesting experience that I had was actually working for a Nordic bank where openness and frankness were key. You can tell people exactly how you felt and not to hide too much, as long as it is communicated in a tactful manner.
The flipside, the Nordic culture is by and large very consensual. So it’s very hard to actually get an answer or be definitive. Broadly generalizing, French banks (and elsewhere) tend to make decisions decisively, right or wrong. I think across the cultures there’s something good and something less desirable in every one. Being an American, nobody is perfect, right?
HL: Yes, yes, absolutely.
OR: So, you can have a love/hate relationship with every country.
HL: How perfectionist are you when it comes to on-boarding a manager? What are your criteria? Is there a minimum level of assets?
OR: There is no minimum level. In terms of when we on-board funds, what we generally tend to do is talk to our investor community and see what they have to say. Because we don’t represent anyone, we don’t get any commissions from the sale, etc.; we don’t have any exposure per se in those areas. We do have reputational risk, however. If a manager calls an investor and then says that he was recommended by Murano and that investor knows that that fund is anything but perfect, then they might not take our call again.
So we do have to be fairly careful on who we get on board, and also we don’t want other clients who are extremely reputable to have to share their good reputation with a bad one.
HL: I see. So have you ever had reason to discontinue a relationship with a manager?
OR: Oh yes. Yeah, we’ve been lucky because we have dodged a few bullets, but we were happy that we didn’t take on some of the accounts. And I’d say that roughly one in 10 of the accounts fail the acid test for any number of reasons. What’s interesting is that this community is fairly small and there is usually somebody who knows something about the prospective manager. What comes out of the conversations is sometimes very interesting. At the same time, you have to look at the managers with warts and all. So if there’s something that is actually not a great selling point, but it’s not disreputable, then that’s something they just have to deal with in their business.
HL: Right and have you ever managed to put providers of seed and acceleration capital in touch with small or new managers?
OR: Yes, we do that all the time. If you look at our database, we have over 500 investors that will look at funds seeking seed or acceleration capital. And what’s interesting is that these seed allocators are always changing. Seeders or accelerators will come into the market, they will allocate to a couple of funds and then they’ll be gone for about two, three, five years. The target is always, always changing.
HL: I see. What are the main challenges and opportunities that you see for your business in 2015?
OR: Well, to a certain extent our business is dependent on the market. If you went through a 2008 scenario, then obviously the business would shrink. But one thing that is comforting is that it seems as though the industry is stabilizing. The markets will always ebb and flow. But it also gives an opportunity to a large amount of managers, and a lot of ideas in terms of trading.
So in 2014 we’ve been fortunate to double in a year. We hope to double this year to reach our capacity to 125. We have about 70 managers, so hopefully it would be nice to get up to capacity and just continue to move the industry into the direction that we see. If you look at what Murano does, it’s really just trying to be a facilitator. If investors will speak to us for about 10 or 15 minutes, and if we’re listening, then hopefully they’ll speak to managers that they do want to speak to. Hopefully, our social-friendly buying process will become more and more accepted among the fund managers.
HL: Well, that sounds very encouraging. Ole Rollag, founder of Murano Systems, thanks very much for your time today.
OR: Thank you very much.