2015 was a really tough year for fund managers. According to Hedge Fund Research, the average Hedge Fund ended up losing, and also underperformed against the S&P 500. In fact, 674 liquidated in the first nine months of 2015. If the trend has continued into Q4, we would have seen more 2015 liquidations than in 2014, which saw 864 hedge funds close up shop. We’ll find out when numbers are released in a few weeks…
Anyone who’d hoped that 2016 would start off bright had their hopes deflated quickly. Chinese markets were down 7% before most of us were moving on this side of the world, triggering its short-lived circuit-breaker experiment, and causing European and American markets to get rocked as well.
With all that said, 2013 and 2014 saw more new fund launches than closures, and while 2015 saw a slowdown of launches, wealthy investors can still choose from 10,000++ global hedge funds which are tossing around approximately $3 trillion.
And They Still Keep On Launching
Hedge funds continue to launch because everyone has read about the few managers who have earned $1B/year running their funds. The secretive and exclusive nature of starting a hedge fund has a draw for someone who has already established a successful track record.
What one must realize is that starting a fund is a very challenging endeavor that takes a multi-year commitment to refine your strategy, build your team, find your niche marketing spot, and foster trust in investors. It’s not something you can just do with some capital, a computer, and a telephone.
You’ve got relationships with seed capital providers, HNWs, foundations and endowments, and the like across your glittering career, but how are you going to convince them that you’re doing more than just separating their wallet from them? And how are you going to convince them that you are in it for the long haul?
Developing an overall vision for your fund, building a brand around it, and coming up with the marketing collateral required are ultimately used to (1) attract new investors, and (2) hold on to your AUM in years with below-benchmark performance.
Historically high quality returns do indeed drive points (1) and (2) above, but there’s more than that to why investors come to you, and stick with you. The article below describes how Bridgewater’s “Show. Don’t Tell” approach helped them to hold on to their $150B+ in AUM in 2013 despite mediocre performance, and how most managers confuse “trust” with performance.
Much of building your vision, brand, and marketing collateral would seem like simple Business 101-type details, but they are often overlooked or poorly executed. Investors who have been looking around to place capital can tell quickly if something was thrown together at the last minute, or if there was a lack of effort in setting up the fund.
Performance is a given. It has to be there for you to even think about starting your own fund, but there’s that whole other world of commitment to the process. You’ll be building trust in investors and over time (and with lots of effort), your competitive advantage. And you have to be all-in, ready to show that you’re prepared to fight through all the ups and downs along the highway to becoming a successful manager.
You can’t “sort of” ride a rollercoaster. Either you are hurtling through space at Mach-2 with your hair on fire or you’re standing on the ground below. You can’t do both. To dangle one foot outside the speeding car is mighty dangerous.
By Alan Chu