Nathan Anderson of Clarityspring wrote a very insightful article on the types of investors hedge fund and alternative asset professionals encounter on a regular basis. I found his article to be excellent!
The Five Worst Types of Hedge Fund Investors
Hedge fund marketing is a tricky sport, and there are some pitfalls to be aware of when meeting with investors. Here are 5 of the worst types of meetings that hedge fund managers experience and how to interpret or avoid them.
5. The investor who is a cog in a massive machine.
This is the meeting where an analyst at a large institution with oodles of capital agrees to listen to your pitch. (After all, a 1% shot at $100m is practically $1m, right?) The analyst is the first line of defense for a massive pool of money, and will determine whether your fund would be a candidate for their internal manager database for consideration as a future investment.
Congratulations! You check all the boxes during the initial screening meeting, which means you move on to the next step. You will now need to upload all of your information to their internal fund tracking system which was built in FORTRAN in 1989 on servers that are powered by hamsters on exercise wheels.
Upon completing your profile, you will need to check back every month to see if there are any open RFP’s that can be filled out to apply as an investment candidate. Upon identifying and filling out the 50-page RFP, which requires substantially all of the same information you submitted to the hamster servers, your proposal will be sent to the independent consultant for review and recommendation.
The consultant will then summarily throw your RFP in the trash because there’s too much reputational risk involved with working with a new firm, and ultimately will suggest the investor re-up with the same manager they suggested last year and the 15 years prior. The committee will unanimously agree with the recommendation, then next year will cite the consultant’s poor decisions and the harsh market environment as to why they underperformed their policy benchmark.
Bottom line: Avoid the temptation to go after these illusory elephants unless you have $1b+ and an ‘in’ on the process.
4. The investor who has seen it all before and desperately wants you to know it.
Hallmarks of this meeting: The investor finishes all your sentences, name drops other funds that may be similar (but not really) to what you are doing, and casually inserts how they used to work with a guy who did what you do when they were at [insert bulge bracket bank]. This investor knew your boss before you were born, and managed money doing the same thing back when the rules allowed you to do something crazy which is now is illegal but made people a lot of money. Unfortunately, the new rules neutered your strategy and now it’s a commoditized pile of manure.
These meetings aren’t about your fund; they’re about prestige (or at least the illusion thereof.) These investors want their ego stroked, but they also want to hear about how connected you are, how many people you know, and whether you can drop any new knowledge on them. If you can show that you’re cooler than they are and show more false bravado, you’ll win respect in their eyes.
3. The investor who doesn’t know what you’re talking about but plays along to seem smart.
These meetings always seem deceptively positive. Hallmarks of this phenomenon include an investor’s knowing nods, complete agreement with everything you say, ironic phrases such as “yeah, that makes a lot of sense” and follow-up questions that are so soft they might as well be giving you a relaxing shoulder massage. Managers often come away from these meetings thinking everything went fantastically (a slam dunk!) only to be baffled by several weeks of radio silence followed by a wishy-washy response.
Managers that deal with more complex strategies like volatility arbitrage, structured products, and quant encounter this situation often. Despite this, every strategy is likely to encounter this scenario at some point. Most high-quality managers tend to be nuanced in their approach, and the reality is that many investors won’t understand that nuance.
It is incumbent on managers in this situation to understand the investor’s comprehension of the topic before going too deep. Your messaging should be clear and concise enough to be understood by nearly anyone, but you must also calibrate the communication to the investor’s knowledge level. It’s ok to ask the investor questions such as “what is your experience level with options?” because it sets the stage on honest footing.
Everyone has ego, and most people are too polite to come right out and say “I have no idea what the heck you’re talking about”. Managers fall victim to their nerves & ego here too because they usually too focused on their pitch and too encouraged by the investor’s affirmations to see that it’s not real!
3. The investor who is just going to rely on someone else’s recommendation no matter what you say.
Hopefully you were warmly introduced to this investor by a friend, otherwise it’s going nowhere.
If you meet this investor cold, they will kindly listen to you but will eventually imply that they need to “run it by [so and so] to get their thoughts.” Your strategy could be the holy grail of finance wrapped in a pitch that’s slicker than Fonzi but it won’t matter. This investor will not have the self-confidence to weed fact from fiction and will be uneasy making a decision without relying on someone else.
To be clear: this isn’t necessarily a bad thing. It’s quite admirable to know what you don’t know and seek the advice of experts. It’s just that generally these meetings degenerate into a waste of time for both parties without a decision-maker present.
Hallmarks of this meeting include a polite but evasive tone, and a total glossy-eyed ‘not really there’ look on the part of the investor because they’ve already checked out. Your best bet is to learn as much as you can about the decision maker and formalize the next step as much as possible. Don’t over-pitch here. Keep it short to save both parties time.
1. The ‘investor’ who is just completely faking it.
Some people like to fake it until they make it, and there are ‘investors’ roaming around who simply have zero capital to invest. These are the same people who buy empty bottles of Chateau Lafite-Rothschild on eBay, fill it up with discount wine and then crow about how they’re saving it to celebrate the next ‘big deal’ they close. Beyond pure ego however, fake investors do benefit from the perks of ‘investor-only’ events and networking opportunities that come to those who are talented at pretending to be wealthy.
This phenomenon is somewhat rare but there are several individuals who are known in the industry for meeting with everyone and simply never allocating. Usually this happens when they get socially cornered at a cocktail party and have to accept the meeting. Hallmarks of this type of meeting are similar to those of an investor who needs to rely on someone else. A politeness, evasiveness, a lack of understanding of the strategy (typically) and vague references to quasi-interest and follow-ups. There’s really not much one can do to avoid this occasional circumstance unless you have a knack for identifying fake Rolexes in advance.
Best of luck out there!