The hedge fund industry often comes in for a great deal of criticism - not always deserved - highlighting the need for excellent communications with clients. This article sets out the case.
Max Hilton, director at public relations firm Peregrine USA, is unsurprisingly of the view that good PR and communications are important in the financial services industry. But as he makes clear in this article about the hedge fund industry, strong communication is essential at a time when the sector faces regulatory challenges like never before and when clients are more demanding than ever about performance and fees.
A handful of the top alternative investment firms on both sides of the Atlantic have realised the importance of brand communications. Unsurprisingly, they are among the industry’s most successful firms. What do they know that others are missing?
For a start, they have acted to manage and build their brand communications. For the lucky few that have got this process right, the rewards have been immediate and tangible as asset allocators have increasingly invested in alternatives in order to meet their long-term investment objectives.
Many alternative asset managers know they need to communicate more effectively. Clearly, allocators need to be able to identify the investment benefits of what an alternatives manager is offering. Yet they also want to know more about the intricate workings of the alternative investment firm, particularly on compliance and risk.
Communicating is vital
In such areas the ability to communicate efficiently, clearly and regularly is becoming ever more vital. This is particularly true for US-based alternative fund managers. Under the Alternative Investment Fund Managers Directive, US managers are now under severe communications restrictions which limit them to receiving "reverse inquiries". In effect, managers who are not registered with the AIFMD are prohibited from direct outreach to both private and institutional investors in the European Union.
Under the AIFMD regime, investors must uncover and approach a US-based manager. The bottom line is that investor interest from Europe is directly related to how a fund is known, understood and accepted. In other words, the ability of a US alternative fund to raise assets in Europe is now intimately linked to brand awareness, effective communication and the ability to educate investors.
Becoming better at communications isn’t just an imperative for alternative investment managers aiming to succeed in Europe. Indeed, major developments in the US mutual fund space, notably the proliferation of the alternatives ’40 Act, are making managers realise the imperative of structuring communications in ways that help to meet the unique demands of different types of investors.
Brand building facilitates communication
What needs to go hand-in-hand with structuring communications is an effective brand building strategy. In this respect, a number of successful alternatives managers have embraced investor education as a way to attract attention and get recognition in an increasingly crowded fund landscape. The growth in demand for liquid alternatives products (total assets under management in alternative mutual funds, including non-traditional bond funds, surged to $255 billion last year , more than double the amount for 2010, according to Morningstar) is rewarding those managers who have managed to differentiate themselves by successfully building a brand. Indeed, in a report into launching a ’40 Act fund, SEI Investments observed: “No manager hoping to break into the market will succeed without a strong brand strategy.”
An integral part of such a strategy is controlling risk. Since alternative fund investment strategies are generally less well understood, managers are more prone to media criticism. Being more prone to negative headlines increases the stakes and underscores the need to manage communications and build a reputable brand. Put simply, uncontrolled communications are unacceptably high risk. Therefore, a systematic and controlled content strategy is critical.