Written by Steve Knabl
The majority of capital allocations, worth untold billions of dollars, flow in and out of the largest hedge funds around the globe. This cannot be disputed. Managers of smaller funds simply do not have the contacts that their counterparts enjoy, making their jobs exponentially more difficult.
The Common Wisdom about Investors
When dealing with large sums of money, investors, like ordinary human beings, tend to be risk averse. We think these larger funds are safer and more reliable when allocating money. So we especially like to eliminate risks for which we are not remunerated—for example, operational and business risks, as well as what happens to our brand reputation if things go wrong. So we play it safe—but is that the best opportunity?
Moving Away from Old School Communication
Whether you are a bright young teenager or a savvy CIO, information is handled differently today than it was 20 years ago. I have the impression sometimes that the alternatives industry has not evolved at the same pace as the rest of the world. We are all still utilizing power point marketing decks and relying on old-fashioned gate keepers, family office seminars, and traditional manager-investor meetings to form working relationships. To become a worthy competitor, emerging fund managers should maximize their contacts for capital growth.
How to beat Goliath?
The biggest complaint new managers have is the difficulty in raising capital. To listen to them, you would think that now is the worst time in history to launch a new fund. I heartily disagree with this assessment – there has never been a better time to start a fund today. Not only is it easier than ever, fully fledged platforms are quickly popping up and becoming increasingly sophisticated as well, with institutional investors taking notice and most importantly, investment opportunities are everywhere.
The Investor Rolodex and Snowball Effect
The alternatives industry has currently reached an impasse in communications. While tactics are inefficient and brutish, large asset managers have the necessary resources to maintain their connections with allocators. Similar to the snowball effect, a growing fund gets more investor interest the larger it gets, as funds are invested accordingly. Not only do the larger funds have ample resources to throw at inefficient fundraising methods, they also grow faster than their smaller counterparts, making a small problem grow bigger, just like a snowball. I call this the Marketing Bias because you know who you know; marketing oriented managers are well publicized, and most buy-sides have the same investment approach using the same metrics.
As such, the global economy is dominated by run-of-the-mill mutual funds, and sooner, rather than later, the alternatives industry is going to catch up if smaller managers can be heard, especially when they are already outperforming their larger siblings.
Allocators have not teamed up to force smaller players out of the game; it is business as usual for them, pursuing high-risk adjusted returns. Remember that smaller, nimbler managers have historically delivered more regularly than their larger counterparts, which is well-documented. The problem is that small managers may not be taken as seriously, mostly due to business and operational risks which can easily be removed by joining a smart platform service like Swiss-Asia, which specializes in business continuity, compliance, operations and focused events like our first Capital Introduction in Singapore – please visit http://www.swissasia-group.com/cap-intro/ for more information.
It will be much more difficult for the larger funds to dominate the bandwidth of investors, large or small. So, if you are starting a new fund, don’t do what you have always done, because it will not work against Goliath. Embrace new ways of thinking and the tools that go with it – take yourself and your fund to the 21st Century with us.