If you build it…

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Ask a hedge fund manager what business they’re in. Chances are, you’ll hear: “I am a long/short manager”, “I run a convertible arb book” or “we are private equity investors.”

if you build it

 

That all sounds reasonable….except that it’s not really an accurate response to the question. Your systematic global macro product is your widget – it’s your strategy… not your business.

 

“I am in the asset management business…”

 

Totally agree. You are getting warm.

 

“My job is to deliver high quality performance for investors while creating manageable, sustainable asset growth for partners.” (Feel free to drop in words like…“risk-adjusted”, “uncorrelated”, “alpha-generating” and all that).

 

Love it. Getting warmer….

 

In the simplest terms, using the most convenient definitions (yeah, I really did just quote the Breakfast Club)… the business of a hedge fund is both asset management AND marketing.

 

As a matter of fact, replace “asset management” as appropriate, and that is basically the business of any business.

 

And while yes, performance matters (a lot) in our business, one can argue that as a hedge fund manager, you are actually more in the marketing business than you are in the asset management business.

 

Here’s why…

The beauty of most asset management vehicles is that they are structured to provide you with a recurring revenue stream. Raise assets and you will get paid on them for as long as the assets stick around – it’s an annuity.

 

So, as a GP, doesn’t your purpose really come down to raising as much high quality assets as your capacity allows?

 

And if there are two ways to grows assets (performance and new subscriptions) why do so many managers still limit themselves to, “I just need to put up good numbers and assets will flow”?

 

“If I build it…they will come.”

 

You and 9500 of your closest asset management friends…

 

If it were just about performance, then 90% of all managers would run zero – and that includes some of the largest names in the industry.

 

Growing assets from $100mm to $250mm is ridiculously hard – particularly on performance alone (think – five years of 20% compounded annualized returns).

 

Complement that outstanding performance with high quality, differentiated marketing and true investor engagement, and you will almost certainly expedite the process.

 

I’m not saying that building asset momentum comes down to just writing a few institutional tickets…but the reality is, asset momentum comes down to writing a few institutional tickets.

 

Imagine where we would be if the inventors of the Snuggy stopped at, “if we just make a good blanket, sales will come”.

 
By JD David
 
 
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