Communicating with current investors is job one

The New York Times' DealBook blog profiles JHL Capital Group, a Chicago-based hedge fund run by James Litinsky.  While JHL returned up to 18 percent to investors last year certainly bucks the current trend, it is not the only thing notable about the fund.  From his quarterly letter to investors, Mr. Litinsky clearly realizes that resting on the laurels of exemplary performance is not sufficient in today's environment.  Good returns alone might not prevent newly risk-conscious investors or investors who have suffered losses elsewhere from cashing in their chips.  Managers must give investors compelling reasons to stay in the fund or risk redemptions.  

In the case of JHL, Mr. Litinsky uses his quarterly letter to reinforce his investment philosophy and detail the business case for two primary investments, the bonds of The New York Times Company and Lamar Advertising.  For each, the fund explains its view of why the debt was undervalued, but secured.  It also explains why neither company is likely to default in the near term and goes on to give worst-case scenarios for both investments.

Mr. Litinsky writes: "In both the NYT and LAMR situations, we modeled out the path to paydown.  We not only had asset coverage well in excess of our basis but also had a priority interest on family heirlooms.  If conditions deteriorated further, the management teams would likely be most focused on maintaining long-term control of the assets rather than extracting an extra dividend or attempting something more overtly hostile.  Those are the kinds of borrowers we like."

This level of transparency is one way to give investors the confidence to maintain or even increase their commitment to a hedge fund.  Right now, getting the right information to current investors is job one, superseding any new marketing and fundraising.