With some statistical evidence that smaller hedge funds are bringing in more inflows than their larger rivals, this article considers how the less bulky players can take on the behemoths.

Around the half-way point of the year, investors will want to take stock of developments even if they know that it usually makes sense to evaluate results over a longer period. Frequent commentator for this publication, Diane Harrison, principal and owner of Panegyric Marketing, considers such issues in a hedge fund context. (See a previous article of hers here.) One issue that she focuses on here is how, at least according to some, the largest hedge funds tend to dominate inflows, if only because of their brand recognition and supposed greater success and strength. But performance and scale are by no means identical, and there may be smaller, overlooked players deserving more attention. As if to anticipate this view, Hedge Fund Research, the Chicago-headquartered firm, recently (April 19) reported that inflow favored smaller firms in the first quarter of this year, as firms managing less than $1 billion in AuM received $2.8 billion in inflows, while firms managing greater than $5 billion experienced modest outflow of $330 million and firms managing between $1 to $5 billion saw outflows of $1.36 billion.

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Hegemony, holding a slightly sinister meaning in most contexts, defines an asymmetrical power relationship, in which there is social, cultural, ideological, or economic influence exerted by one group over others. Where better to see hegemony in practice than in the world of hedge funds, when the behemoth bests the niche fund, in terms of investor attention, assets gathered, and institutional scrutiny? Yet there are real benefits to be found when one can look beyond the obvious asset size power play and seek strategically advantageous investment funds that serve the needs of investors. The managers of these less-notable funds will benefit from tips on how to gain more notice from niche seekers and show themselves as a focused agent of investment talent.

Small can be mighty
I live only a few miles from the hometown of one of America’s true war heroes, so want to share the story of small triumphing in the face of huge odds as an apt example of beating hegemony. Memorial Day in Raritan, NJ is also known as John Basilone Day, a WWII war hero the town memorializes with all its other veterans. A good summary of what made John a hero is encapsulated on the website World-War-2-Diaries.com:

The US-led forces landed on Guadalcanal on August 7, 1942, surprising the Japanese and seizing an airstrip called Henderson Field. But the Japanese clung on tenaciously and fought bloody battles against the Allies before finally relinquishing the island in February, 1943. A regiment of 3000 Japanese soldiers from the so-called “Courageous” Sendai Division descended on John’s unit defending the airstrip. The attackers came in from the front lodging grenades, machine gun shells and mortar fire. John led the defense with two machine gun sections of about 15 men. They fought almost without a break for the next two days. John's comrades were cut down around him until he was left with only two other Marines fighting off wave after wave. He repaired a machine gun, helped move another one into position and maintained continual fire until backup arrived. John took enemy fire, streaking through the jungle to pick up more machine gun belts to keep his comrades supplied. By the time the next dawn broke he was fighting with just a machete and a .45 pistol. The Japanese regiment was laid to waste. About 3,000 Japanese Banzai soldiers had been killed in the attack and the airfield had been successfully defended. America had itself a new hero. John Basilone received the Medal of Honor, the Navy Cross and Purple Heart. (http://www.world-war-2-diaries.com/john-basilone-biography.html)

Obviously, John Basilone had bravery in spades, courage under fire, and the ability to perform in the face of overwhelming odds. While fund managers don’t need to fight off enemy forces in the jungle, there are some tactics to be gained from John’s heroic efforts that managers might adopt in their business approach. Here are just a few to consider:

Focus - Niche means special. Your target audience is also niche. Identify who they are and focus your marketing efforts primarily on them. Better to be successful in a segment of the investor market than to be indistinguishable in the overall investment universe. Most niche market players have an optimal capacity level for AUM that is impacted by investment style, opportunities, or operational set up. This level means that the marketing effort for the investors seeking niche strategies is also more specialized, and requires an outreach effort designed to influence them.

Brand - Your business as a memorable choice. Strong branding means developing a reputation for being outstanding in concept, execution, and service. You need to convey what you do, how it’s done, and how it benefits your clients now and going forward in a way that is noticed and remembered. There are many ways to brand a business, but all require a focus and commitment from the owner that continues the practice of both communicating and delivering a message that is consistent in tone and practice.

Responsiveness - Sometimes moving forward isn’t so much about what you have planned and intended to do, but how you can adjust and adapt to the changing situation in which you find yourself. Flexible managers are especially situated by virtue of their smaller size and fewer commitments to improve their responsive ability to meet client needs. The ability to customize a program is consistently a quality that investors rank highly when considering putting money with a smaller fund manager, so become one of the managers that live in this category. 

Effort - You do get points from investors for trying harder in the area of client service. Show your enthusiasm and confidence in what you do and how it can be a benefit to your investors. Just because your AuM is small doesn’t mean your investment talent is as well. There can’t be too much emphasis placed on superior client service. Niche managers have a smaller pool of clients to provide attention to, but a greater opportunity to have a personal impact on them. Show you care what your clients think. Schedule client calls, have meetings with your important investors, and be accessible to all of them as needed. No manager ever regretted earning a stronger relationship with those who invest with them and can refer others to invest.

Persist - Small wins can have a great impact on small firms, whereas large firms don’t always pay attention to such progress in the face of overall dominance. The first years of building a niche or specialty fund business are hard in many ways that these managers know all too well. The struggle includes building out operations, finding like-minded investors, and delivering an investment result that is distinct and superior to competitor programs. It is a daily battle that requires a series of successive wins to advance. But developing a compelling investment product and telling its story in a memorable way to the right audience can land a key investor that keeps the small manager on the right path to victory.

About the author

Diane is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets.  She has over 25 years’ of expertise in hedge fund and private equity marketing, investor relations, articles, white papers, blog posts, and other thought leadership deliverables.