Following the events of 2008, institutional and retail investors alike have become more demanding. The need for greater levels of transparency, liquidity and regulatory oversight are criteria that UCITS funds can meet. For hedge fund firms, UCITS products enable them to diversify their investor base and explore multiple distribution channels. However, to take advantage of the UCITS opportunity requires a different approach to marketing.
Until now, investors have seen traditional asset managers and hedge funds as separate asset classes, both of which have their place in a portfolio. Whetherthe UCITS umbrella is used to target retail or institutional investors, the convergence of hedge funds and mainstream asset managers is accelerating and inevitably competition is rising. They both promise investors absolute returns, transparency, pre-established risk and liquidity management and a sense of safety. There are, however, some differences; one group of managers has a long history of using absolute return techniques, quantitative models and some other, more exotic strategies, but little or no history of marketing, especially to a retail audience, whilst the other group is the polar opposite. The well-oiled marketing machine of traditional asset managers helps to push their UCITS funds in front of the same investors that hedge funds are targeting but they can shout louder, more consistently and have the strength of a recognised brand behind them.
On the other hand, hedge fund managers, with the more established pedigree for running absolute return strategies and arguably the potential for stronger returns, due to regulatory constraints, have been unable to develop sophisticated marketing departments and few have a brand that is recognised outside industry circles. This presents a danger that UCITS funds run by hedge fund managers may be overlooked by investors in favour of those funds run by managers who are more readily recognisable. Some traditional fund managers are already offering hedge fund-managed UCITS vehicles (Merrill Lynch, JP Morgan, Schroders) but for many of the managers launching UCITS funds, marketing will be an uphill struggle.
Where is all the money going?
Firstly, how much of investors’ money is finding its way to the traditional managers? And secondly, is there a difference in performance between them and hedge funds? According to Lipper Feri, as of March 2009 all of the top twenty managers of UCITS funds with an absolute return/total return profile by AUM were traditional managers (see the top ten listed in Table 1).
These figures clearly show Deutsche Bank head and shoulders above the rest in terms of AUM and highlights just how dominant traditional managers have become. The same data shows that 644 managers have a total of €99.5 billion under management, which means the top ten (with AUM of €29.2 billion) make up almost 30% of the UCITS absolute return landscape. In terms of performance, data is fragmented at best and many hedge fund-run UCITS funds do not have the track record for meaningful comparison.
However, anecdotal evidence points to performance on a par with, or better than, the traditional managers. The risk is that smaller UCITS funds run by hedge fund managers are going unnoticed despite performance being comparable with larger funds run by traditional managers.
With such high profile managers competing for institutional money, barriers to entry for smaller hedge fund managers are high not only in terms of the infrastructure and regulatory costs, but also when it comes to raising capital. As the UCITS world utilises custodians rather than prime brokers, hedge funds need to look at diversifying their distribution channels in order to access retail and institutional investors. Some, like Highbridge, BlueCrest, York Capital, GLG and Marshall Wace have distribution partnerships with banks, whilst others may be tempted by platforms set up by companies such as Merchant or Ganymede and LFG. Others, including Man Group, have the capability and distribution infrastructure already in place and are competing with traditional managers. The majority of hedge fund managers, however, are looking to run a successful UCITS fund outside of platforms and partnerships but lack the institutional infrastructure.
The challenge now is to ensure these hedge fund-run UCITS funds are given the same airtime with investors as those run by traditional managers.
Standing out from the crowd
To gain greater exposure, especially whenentering the retail space, hedge funds need to change the way they engage with investors and managers must evolve and embrace the dark art of marketing. Marketing itself need not be difficult but what is tougher, and what many managers still fail to do, is to communicate effectively. What makes the fund different? Why should investors choose to invest in it over any other in the market? Performance is no longer the only yardstick. The UCITS directives prescribe benchmark levels of risk management and infrastructure, so differentiation must now come from how managers convey their investment process and philosophy. This is where traditional managers have the upper hand as for years they have needed to convey concisely what their approach to investments is, why it works and how it relates to their performance. In turn, this is used as the basis for all marketing materials, to reinforce the identity of the fund and the manager. Over time, this builds a brand for the fund and potential investors understand the proposition well before meeting the manager.
Traditional managers are now exploiting these brands to good effect, driving the convergence with the alternative sector and hedge funds need to adapt to this or risk being marginalised. Though direct competition may not be viable in the immediate future, there is much hedge funds can do to make sure their UCITS funds receive the same attention as those of the larger traditional asset managers, such as:
1. Be clear: why UCITS?
Consider the reasons for utilising a UCITS structure: what is the driving factor? Is it to raise incremental assets, target a new investor base such as retail, or for the improved transparency and liquidity to attract more institutional clients? Or perhaps it’s to keep ahead of any regulatory changes relating to the draft legislation coming out of the European Union.
2. Know your market
Next, consider what types of investor the fund is targeting and how the fund will be distributed. This will inform the positioning and key benefits of the fund. The language used to engage with different types of investors varies widely from sector to sector. For example, a retail investor may require education about absolute return funds whereas institutional investors demand more in depth information.
3. Develop marketing materials
Having decided on the audiences, the distribution channels and the marketing messages, the next stage is to develop institutional-standard marketing collaterals. Whilst these documents have not warranted much attention in the past, in this new and more competitive world they are a way of inspiring investor confidence and presenting a professional, responsible face that will go some way to allaying the fears of investors burned by some hedge funds in the past. Marketing information needs to be clear, messages need to be defined and used consistently, and new channels should be explored to reach potential investors.
4. Learn from the competition
Looking at how traditional asset managers promote their UCITS funds will illustrate what best practice should be. Most have an online presence for their UCITS fund with downloadable documentation, information is presented concisely in layman’s terms and, crucially, visitors can access much of it without registering or logging in. Sites are well designed with the branding carried through to the brochures, factsheets and simplified prospectuses, ensuring that visitors to the website or readers of the collateral immediately know who the manager is and what the fund’s objectives are. Potential investors expect to see materials that are produced to this standard. Though good materials will not guarantee investment on their own, substandard materials will undoubtedly harm any chances of securing investment.
5. Keep on talking
It is essential to continue building your brand through consistent communications with the investor community, both online and in print. The most effective way to do this is through a well thought out media campaign. This is not something that hedge funds have felt comfortable doing, but UCITS allows for greater freedom of speech enabling managers to talk relatively freely about the market and implicitly demonstrate the value the fund provides. This takes careful planning, so make sure you define which journalists you need to cultivate relationships with and why, crystallise what you want to say and make sure everyone who speaks to the media sticks to the same message. Through consistent use of compelling messages that are both relevant and accurate, the fund will start to be seen in the same light as those of traditional asset managers.
The world has changed dramatically over the last 18 months. Hedge funds are perhaps one of the groups most affected by this change and the increased appeal of UCITS could well be a defining moment in the sector’s evolution. To compete, managers will have to become more institutional in the way they operate and those that don’t risk being marginalised.
UCITS is not a one size fits all solution, but the impending threat of controversial legislation makes it an attractive avenue for many. What’s more, UCITS may not offer the flexibility or creativity of a true hedge fund, but for many investors this is a price worth paying in these risk-averse times.
Kate Shaw is CEO of Living Group, specialists in joined-up communications for the financial and professional services sectors, with an emphasis on hedge funds.