Sunday, June 28, 2009

Getting serious about hedge fund marketing

Hedge funds are marketing harder than ever and fewer investors are listening. Investors report fielding more phone calls and receiving more marketing literature from fund managers and are taking steps to limit the deluge. At the recently concluded GAIM conference, for example, in order to avoid being badgered by funds on the hunt for new cash, one family trust manager had cards printed without phone or email information.

What do hedge funds have to do to be effective at fundraising in this environment? Hedge Lines recently spoke about the challenge with two asset management professionals. Not surprisingly, many of the keys fundraising hinge on effective communication with investors and other influential parties. Here is some insight:

It's the strategy, stupid. Hedge funds need to understand that smart investors buy into strategy, not simply performance. "The key is for the manager to show conviction in his or her ability to manage money," said author Daniel Strachman. "They need to be able to communicate how they actual put a trade on and why. Performance is important but conviction in one's strategy is more important and ability to communicate why the strategy works is most important. If it was me, this is what I would be talking about all day and all night."

Don't hide losses, explain losses. "Funds need to communicate in the big picture what happened, not just the number," advises investment professional Andrew Tilzer. He says that funds need to be clear about the time horizon they use and their peer group to put performance in context for investors. "If I was down 10%, 20% or more or less, the story would not be the returns it would be the strategy and why it failed," said Strachman. Document strategy with proof of your real-time thinking, like investor letters, to show consistency and conviction, adds Tilzer.

Invest in relationships. "Too many hedge funds don't truly know why their existing clients came to them and how they appeal to different classes of investors," said Tilzer. "To raise new assets, it is important for funds to have the patience to learn what existing LPs like about them and what prospective clients need." This outside-in perspective helps define what makes a fund unique and gives the fund insight about the niche they fill in the market that they can use to further differentiate themselves.

Leave marketing to marketing people. The Reuters story cited above noted that more managers attended this year's conference in person, as opposed to sending marketing staff. This is a worrisome trend and PMs need to resist the urge to be personally responsible for marketing. "There is a difference between being a portfolio manager and a business manager," explains Tilzer. "To be efficient, the manager has to respect the back office."

Don't hang up on the media. "The idea that hedge funds don't want to talk to the press is lunacy. It is also lunacy to think that talking to the press will help raise money - directly. Indirectly, however, talking to the press is a good thing because it provides third party credibility," notes Strachman. Too many funds are disengaging from the media process and the industry needs to resist that instinct. Quantitative and activist strategies are among those currently out of favor. Managers in those sectors, for example, need to use the media to promote the investment case for their specialties.

Wednesday, June 10, 2009

Ackman to media: Screw you guys, I am going home!

Seven months after announcing that he was going to become more visible via the media, William Ackman is going home. In November, Ackman told investors that he decided to engage with the media, in part, because "it is important for the hedge fund industry to come out of the shadows and defend the importance of our work." Now, in his most recent letter to investors, he writes, "you should expect that we will do our best to fade into the sunset as far as the media is concerned until such time as an investment opportunity requires us to work more closely with the press. We hope such time is many moons from now."

In Cartman's words, screw you guys, I'm going home.

What happened? Ackman waged a very public and expensive proxy fight against Target and lost. A media program designed to build support for electing new directors to the Target's board included appearances on CNBC and an open town hall meeting. It didn't work. At the Target shareholder meeting last month, neither Ackman nor any of his other nominees were elected.

What's worse is that Ackman took some lumps in the media. Most notably, a column in the New York Times, questioned Pershing Square's motivation and tactics.

Here's some friendly advice for Mr. Ackman and other shareholder activists:

You need a thick skin. Publicity invites criticism and the motivation of hedge funds are always going to be questioned. That said, if the straw that broke the camel's back was indeed the critical column in the New York Times, it would be a shame. The column appeared after the shareholder vote and the writer had the benefit of hindsight to dissect Pershing Square's argument. As such, it is not as much of an indictment of the fund's approach as it might have been had the column appeared before the vote. Mr. Ackman did not see it that way and felt compelled to issue a long rebuttal. This was a mistake. Activists need a thick skin and be prepared for criticism. When the record needs correcting, it has to be done in a more selective and efficient way.

Understand the risks. Pershing Square needed to understand that most shareholders did not feel that Target was a company in trouble and in need of a shakeup (Target was trading at about $40 per share in early November and is still at that level). Moreover, the core of Pershing Square's campaign hinged on non-operating fixes for Target (selling off its real estate and its credit card operation). It was too easy for the company to paint these strategies as "financial engineering" that had nothing to do with the retail business. Pershing appears to have underestimated the difficulty in changing the prevailing sentiment among Target shareholders:"if it ain't broke, don't fix it."

Nice guys finish last. In Ackman's own words, when it comes to activism "thoughtful and constructive engagement based on careful and detailed analysis focused on shareholder value creation will always, in our opinion, be an effective means to maximize value in the public markets." Maybe not. Throughout its campaign, Pershing Square took pains to be non-adversarial. It praised management and even Target's board. It encouraged "exploration" of options like selling the real estate assets. Curiously, more tangible strategies, like getting Target into the grocery business, as Wal Mart has done, were never at the forefront of the campaign. Overall, this fight needed a much sharper edge to compell shareholders to vote with Pershing Square.

I encourage Mr. Ackman to rethink his decision to withdraw from the public debate about hedge funds, activism and even the business prospects for Target. His next activist situation will require engaging with the media and the steps he takes between now and then can affect the how his argument will be perceived by the market.

He had it right in November when he wrote "if we and others (that includes hedge fund investors in addition to the managers) don’t do so [engage in the public debate via the media], the industry, in my view, is at even greater risk of further regulatory, tax, and other legal changes that will materially harm our business models and industry."

Tuesday, June 2, 2009

Reputation risk sinks Pequot

The resurfacing of an investigation that began in 2006 has led to the shuttering of Pequot Capital Management. The fund, which managed $15 billion at its height in 2001, still managed more than $6 billion in March 2008 and now has $3 billion that will be unwound.

The inquiry focuses on Pequot's trading in Microsoft stock in 2001. While both the SEC and the Justice have reopened the investigation, there is no indication that the regulators will pursue enforcement actions.

Pequot lost money last year, but was up so far this year. Nonetheless, fund manager Arthur Samburg wrote to investors, "With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business.”

Historically hedge funds and other asset managers have been able to weather inquiries and settle with regulators without jeapoardizing their business. These are not normal times, though, and this case shows how management of reputation risk is at least as imporant as the management of market risk to the survival of hedge funds.

Go to the New York Times account of the Pequot closing.
Go to Reuters' story.
See Arthur Samberg's letter to investors.