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You have your self-made, sure-thing investment strategy. You have your fancy Bloomberg terminal that sits next to your stack of “valuable” biz school contacts. And you even have your personal invitation to the Spouting Rock soiree in Newport.
The only thing missing are the assets.
And that’s where 80% of you so-called masters of the universe will fail in the first 12 months.
What I’m describing here, folks, is the culmination of a hedge fund. Some of the brightest people on Wall Street set out to launch one, only to be baffled why the firm usually sticks plywood in its windows before the holiday cards are even ordered.
The days of starting a hedge fund out of your apartment while sitting on a futon the way superstar managers like Ray Dalio and Jim Chanos did are long gone. Now you need the sparkling office, polished furniture, leafy plants and colorful trading screens to make an impact on potential investors. And, that’s just the first stage. Next up, is the deep-dive due diligence process, which will make the fine act of a colonoscopy seem like a vacation.
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All of this takes money and time, which explains why the barriers to entry are as high as ever for new Funds. You typically won’t breakeven until the fund reaches, at least, $100 million under management; and, in some cases, the number can be as high as $300 million depending on the number of analysts and traders working at the firm, in addition to the pedigree of the vendors used.
And this is why the statistical probability of your new fund surviving is about as high as you playing shortstop for the Yankees next year.
But in recent years, the most successful hedge fund start-ups are the ones who think—and act—like the operation is a business, and not just a fund. The mantra of ‘build it and they will come’ is no longer a viable strategy for those interested in becoming the next Dalio or Chanos. Today’s portfolio manager needs to have strong business acumen, and take the reins as not only the chief investment officer, but simultaneously the chief marketing and mastermind.
So what does biz school teach you to do, Mr. CEO, when seeking max productivity while keeping overhead costs low: Outsource. The secret sauce is to outsource your distribution as you will want to reach as many qualified eyeballs with an appetite for hedge fund investing, as possible—and with a low degree of effort.
In Wall Street parlance, we call this maximizing yield; and there’s one company out there that has revolutionized the way investors find, and allocate, to emerging fund managers.
Chicago-based HedgeACT is above and beyond a category killer in this space. The first cloud-based alternative investment platform of its kind, HedgeACT has realized the importance of mass distribution via high-end technology to accredited and institutional investors.
An emerging manager wants access to a high-level decision maker running XYZ pension? Not a problem when you have the ability to electronically post your pitchbook, subscription documents, and a video where the manager is able to “teach” the prospect on the strategy. Considering the top 500 hedge funds control more than 90 percent of the industry’s assets, finding a competitive advantage while harmonizing your story is critically important for emerging managers.
It’s a proven model and is the positive trend for the industry. According to Preqin, the most recent third quarter saw 179 new hedge funds launch, which is an increase of 11 percent from Q2. And, according to HedgeFundResearch.com, the industry received an increase of $18 billion, or 0.6 percent, in fresh assets into hedge funds, with two-thirds being allocated from the efforts of third party marketers utilizing the mass distribution methodology.
Hedge Funds control nearly $3 trillion in investment assets. Realizing so much money is at stake will likely invite other players to compete with a company like HedgeACT. However, with its ability to streamline the pre-allocation process via technology, it will be difficult for companies to easily take market share. The end result is full transparency and absolute data integrity; which is sensational news for investors and those eager-beaver emerging Fund managers out there.
Todd M. Schoenberger is managing partner at hedge-fund firm LandColt Capital, and the portfolio manager of the LandColt Onshore and Offshore Funds.