The Evolution of a Revolution

Decades of change in hedge fund PR and communications

Originally published in the October 2014 issue

In many ways, it’s classic Las Vegas. High-rollers. Celebrities. Rock stars. Breathless live TV coverage. Packs of admiring press. And enough social media traffic to make Miley Cyrus blush. But this party’s not just another big night in Vegas. At this party – and others like it in London, Monte Carlo, Singapore and New York – the high-rollers are professional investment managers, the celebrities are some of the biggest names in global institutional investing and the rock stars are, well, rock stars. Welcome to hedge fund public relations and communications in 2014. It’s part of today’s $2 trillion plus hedge fund business played on the global stage of financial markets.

It certainly didn’t start out this way, and the occasion of the 100th issue of the AIMA Journal, first published in the early 1990s, is a chance to look back at the early days of hedge funds to see where it all began, how we got here and to think about what’s ahead. A chance to examine the evolution of this revolution in hedge fund PR and communications.

A modest beginning
In its infancy at mid-20th century, hedge funds at the start of the 1990s were a much smaller version of today’s business. While early data is tough to come by, in the early 1990s, hedge funds controlled well under $100 billion in assets, less than 5% of today’s total.

Born in the USA and little noticed even beyond Wall Street, hedge funds in the 1990s were still a niche business in a tradition-bound, mostly long-only world. Conferences were few and low key, some lawyers advised managers against posting lobby signage or even carrying business cards, and learning about managers, performance and funds was a largely word-of-mouth proposition. To the extent that hedge funds hada reputation in the early 1990s, it was generally one consistent with the opacity and secrecy of the sector itself.

In line with this, media focus on hedge funds in the early 1990s was sparse. Database searches of “hedge fund” yield 291 articles among all media for the year 1992, when AIMA Journal’s earliest version was first published. Of that total, 66 articles were in The Wall Street Journal. A sampling of WSJ headlines from that period reflects both a simpler time and hinted at what was yet to come:

  • “SEC Staff Won’t Suggest Hedge Fund Registration”
  • “Hedge-Fund Upstart Outpaces Veterans”
  • “Hedge-Fund Manager Capitalizes on Signals Given by Homeowners”

It was also in the early 1990s that things started to change. Driving that change were the hedge funds themselves, bursting onto the public stage and fostering both curiosity and a certain level of suspicion as hedge funds did what they were set up to do – that is, find and invest in a variety of asset classes using non-traditional investment strategies to achieve better-than-market gains. In particular, one manager’s prominence in betting against the British pound in September 1992 thrust speculators and hedge funds onto the world’s front page.

Glossed over in subsequent years as the investing world inflated a tech sector bubble, hedge funds next came into very public view with the blow-up of Long-Term Capital Management in 1998. Using tremendous leverage to seek to transform small price differences into big returns, the fund was said to control as much as $1 trillion dollars in positions when a default in Russian bonds dominoed into global market chaos. LTCM was both the first big hedge fund blow-up and the first US Federal Reserve hedge fund rescue. It was big, controversial news.

Before and after the LTCM collapse, hedge fund PR and communications was defined by unanswered calls and “no comment”. But despite the secrecy of this private placement business, hedge funds started on a steady growth trajectory as the 21st century dawned. As the dust settled after the big blow-up, new funds were launched, new managers arrived on the scene, and investors began to find this “new” investment approach exciting, available and working.

Read all about it
Thus began an historic era of growth for hedge funds. In those early years it was built on three legs: performance, people and products. As hedge funds captured attention for big performance in difficult markets, the men (and they mostly were) behind them attracted a new level of media attention and were chased by investors and their advisors. As media attention increased, the industry did not quite know how to handle it, save for trying to turn it into new AUM. While the 1990s witnessed slow growth in media mentions, highlighted by a big spike to nearly 20,000 media articles in the 1998 LTCM period, it was the decade of the 2000s when hedge funds began making a big and sustained impression on journalists and consumers of the media. By 2005, the media used the term “hedge funds” more than 100 times a day, totaling nearly 40,000 articles. By 2009, that number swelled to more than 60,000.

Behind this was an explosion of journalists hired by existing media specifically to write about hedge funds, as well as the proliferation of new media outlets exclusively for and about hedge funds. Among these new outlets: Hedge Fund Alert launched in 2000, Opalesque in 2001, HFM Week in 2002, HedgeWeek and the launch of the dedicated hedge fund section in Barron’s in 2004.

The late 1990s and early 2000s also saw the arrival of specialist professional communicators working with hedge funds to “manage” this abundance of attention. With the volume turned up on media attention – print, broadcast and online – hedge funds turned to outside PR frms to help them navigate what they could do, could not do, and, in the end, what business executives running hedge funds had to do in the face of a larger, aggressive press corps eager to cover performance achievements and failures, launches, and the inevitable problems, frauds and blow-ups.

As the number of funds ballooned to greater than that of the number of stocks on the NYSE and NASDAQ combined and as total industry assets accelerated, hedge funds could be found everywhere. They were involved in most financial deals and headlines, stealing top traders and executives from traditional Wall Street, attracting big fund flows from nearly every institutional and high-net-worth investor, achieving historic pay days, and expanding into key global money centres. They were, in short, a natural target for press attention and critique.

Today, media attention has achieved levels previously unimagined. Data shows more than 100,000 media articles including hedge funds in 2013. Aiding and abetting and in some cases trying to minimize that, in-house PR, marketing and branding is becoming common among larger funds, and often used among the smaller and mid-sized funds. And the focus of these efforts is shifting, as well.

As the industry has transformed from cowboys to corporate boardrooms, professional communications is shifting from “selling” the latest performance and new funds to a more measured, institutional approach. On the other side of the table, investors are now more cognisant of the potential headline and reputational risk of investing in even the most respected names in the business and, as a result, are steering allocations away from the “hot” funds and managers in favour of established funds, which can demonstrate a long-term attitude, deep infrastructure and a comfortable level of transparency. Fund flows since the 2008-2009 period to the biggest “brands” clearly reflect this. Regulations, in the form of qualifying as Registered Investment Advisors in the USA and the recent JOBS Act, are also playing a role as fund executives have been given more stable ground to stand on when engaging in previously grey areas of PR and communications.

Even more so, hedge funds of all sizes are facing intense competitive pressures from both alternative and traditional sectors and are being compelled to up their marketing communications game. The ability to use social media, while only a trickle now, may impact hedge fund PR and communications in the years ahead given its power to control messaging and position firms as thought leaders.

However, there are limiting factors. Individual firm culture and what might be called the “tradition of alternative” investment managers are among them. The bright lights of Vegas notwithstanding, hedge funds are by nature private, focused, buttoned-down places, and most managers even today have little interest in becoming media stars. So while changes are happening, the extent and speed of those changes remains to be seen.

More to come
So what’s next in this revolution in hedge fund PR and marketing communications? Here are a few thoughts on the future.

Less personality
As the founding generation of headline-making managers cedes to the next generation and as investors tire of chasing the latest big numbers, the previous PR and communications emphasis on performance, people and products is giving way to a focus on pedigree, process and presentation. This is a well-established road map in many industries, US mutual funds most appropriately, and is under way for hedge funds.

Hedge funds = asset management
Just as traditional asset management firms are buying and building their way into alternatives, a handful of hedge funds are beginning to re-imagine themselves as asset management firms. Volatile markets and the need for institutions to catch up to their liabilities means non-traditional investments remain attractive, though many investors will accept somewhat lower returns in exchange for lower expected risks. The first $500 billion asset “hedge fund firm” will be achieved as 2020 approaches.

Hedge funds are dead; long live hedge funds
As some of the big grow bigger, a not insignificant group of managers will cling to the roots and traditions of non-traditional hedge funds. Low-key, small, targeted, focused, but with real infrastructure, these existing and new hedge funds will serve sophisticated investors seeking outsized, uncorrelated, market-beating returns.

Liquid alts are changing the game
The convergence of the traditional asset management and alternative asset management industries is no more evident than in the rise of liquid alternative products. Now in its early stages of growth, “liquid alts” are and will be the focus of tremendous media and PR communications attention. More than any other single trend, these products will force hedge funds venturing into this arena to take seriously the idea of media, reputation, communications and branding as they enter new markets.

Battle of the brands
As we’ve written before, performance has never been the biggest driver of asset flow to hedge funds. Increasingly, hedge fund executives are recognizing the value and power of brands. Faced with volatile markets and tremendous competition, brand strategies that successfully define and differentiate managers will become a critical part of a firm’s future growth potential.

Tom Walek is president, capital markets and financial services, at Peppercomm. Walek has been involved in hedge fund communications for nearly two decades.