Many traders dream about striking off and starting their own investment firms, but with capital difficult to come by these days, start-up shops are having to find innovative ways to market themselves and demonstrate the strengths of their strategies.
When Anthony Cambeiro left a large hedge fund to found Anthology Capital Group, the trader was surprised by how difficult it was to get investors to seriously consider his fund, in spite of the long and successful track record he had previously.
"It's definitely challenging out there," Cambeiro said. "Assume you are going to reach out to a thousand people, talk to a hundred, to get one investor."
Though some traders turn out to be natural marketers, Cambeiro said that for him marketing involves a very different mentality than investing. A trader might have total confidence in an investment strategy, but demonstrating that confidence to prospective investors can be another thing.
Fortunately for him, Cambeiro frequently dealt with prospective investors at his old firm, but that was as part of a team. Now, he has to sit down with prospects without a large sales team to provide assistance.
"In my previous hedge fund sales experience as one member of a team presentation, I didn't have to know everything and have it at the tip of my tongue," he said. "I now have to be able to talk and think ahead as to what the next key point is I have to communicate."
According to Cambeiro, the sales cycle has gotten longer since the financial crisis of 2008. These days, it's a six-to-nine-month process from meeting with potential investors to actually getting a check, and with some institutional investors, it can take years.
Bruce Frumerman heads the consulting firm of Frumerman & Nemeth, which helps start-up firms better position themselves to attract capital. He said in addition to having all of the right systems in place, such as trusted service providers and a solid legal structure, a firm needs to know how to properly tell its story, to fully relate how it does its research, risk management and decision making.
“There are two jobs for the prop trader who now has started his own shop,” Frumerman said. “First, you have to deliver performance that is in the ballpark of acceptance. Then, you have to be able to educate and persuade people to understand and buy into how you invest, because that's what differentiates you from the competition.”
According to Frumerman, the number one cause of money management firms closing their doors is not because their trading strategies blew up. Rather, it’s because they couldn’t get enough people to understand and buy into how they run their portfolios.
The first step, he said, is getting the right people to hear your pitch. If an investor is looking for a certain trading style or sector exposure, and your firm doesn’t offer that, any meetings will just be a waste of time. Start-up funds should do their research before reaching out to a prospective investor.
Second, in a post-crash environment, investors are looking for transparency, and that means something different today than it did before 2008. It used to be investors wanted to know what all of a fund’s holdings were---now they want to know that and the logic behind all of those holdings.
“One complaint institutions have had is that while post-crash there is more data transparency, more numbers don't reveal what the underlying investment beliefs thinking and investment process was,” Frumerman said. “They are looking to determine whether portfolio managers are doing something on an ongoing repeatable basis, or if it was just serendipity that they happened to get the returns they did.”
Though traders don’t have to reveal every step in their process or every percentage of weighting they give to different stocks, they do have to effectively communicate how their process works. And sometimes, less is more.
Start-up firms often make the mistake of giving a massive pitch book to a prospect before a meeting, and then reviewing some or all of the book when they meet. No prospect will read a long pitch book and retain all the information. Frumerman says a portfolio manager should be capable of delivering his presentation verbally---without walking the prospect through a flip chart page by page. He advises his clients to leave a brochure behind that retells the money manager’s investment beliefs and process.
To be sure, marketing material on a firm’s investment process helps when dealing with institutional prospects who will have to go before an investment committee. Frumerman said traders need to not only do a good job of telling their story, but they also need to make sure that the person going before the investment committee does an equally good job. One other thing Frumerman suggests is to pay especial attention to risk management, which has increased considerably in importance since 2008. Today, risk management can’t just be an overlay. It has to be integrated into a trader’s strategy.
Helping traders develop all-inclusive risk management is the specialty of Sam Won, founder of Global Risk Management Advisors. He said nearly all investors today are demanding institutional quality risk management even from small emerging managers.
New funds need to be able to clearly state in writing what their framework is for risk management, he said, and to explain how the process is intertwined with the investment program. Being able to simply check off boxes on a due diligence questionnaire is no longer sufficient.
“After the events of 2008, it is not enough for a fund manager to simply say that they do some risk measurement,” Won said. “Today, institutional investors expect a fund to substantiate that it has a true risk management process that encompasses controls, such as risk limits, and governance in the form of a risk management committee that has meaningful influence over the investment process.”
Being able to measure risk is important, but funds today need to also demonstrate how they plan to hedge that risk, he added. In today’s competitive environment, investors can always find another firm that offers comparable returns, and if that firm can also demonstrate consistency and sustainability, it will end up being the one with the investment dollars.
After having launched his own firm, Cambeiro has some advice about getting investor money: Line up as much of it as you can before striking out on your own. Some investors will end up contributing less than they initially say they will, and others who promise to invest will end up not putting in any money at all.
Still, marketing a start-up firm can have some pleasant surprises, too.
“Some of the people that you think will invest will never invest, and some of the people that you never thought would ever invest may invest,” Cambeiro said. “You just never know.”
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