Current dynamics in the Hedge Fund industry have prompted a re-think among the management teams of the leading funds. The adoption by some of an institutional-quality Investor Relations program and Client Care approach is having a positive impact on fund-raising and investor relations in the industry. James Phillips, from Gulland Padfield looks at what is changing and its implications for funds of all sizes.
The Hedge Fund industry continues to grow. According to Hedge Fund Research, assets under management rose in the second quarter of 2012, albeit with slowing inflows, to a record level of $2.14 trillion in assets under management*.
Two phenomena are prompting a rethink in the way funds manage relationships with their client-investors. They are especially important given the mediocre performance generated by the Hedge Fund industry during the past few years.
- First, while the majority of asset flows continue to go to the larger and more established Hedge Funds, allocations are also going to funds that demonstrate institutional-quality operations, scalability and client relationship management.
- Second, the sources of investor capital are changing too. In addition to the traditional investor base of family offices, high net worth individuals and Fund of Hedge Funds, institutional investors, including sovereign wealth funds, pension plans, endowments and foundations now account for a growing proportion of new allocations. Investors are increasingly demanding with respect to compliance, operations and reporting.
As a result, Hedge Fund management teams are finding it valuable to devote time and resources to the task of managing existing relationships better. They are adopting client relationship and account management strategies more familiar to long only fund managers and professional advisory businesses. The reward for understanding and managing these clients better is substantial; their assets tend to be more ‘sticky’ and therefore valuable to growing or maintaining a profitable franchise.
It’s an approach James Phillips of Gulland Padfield believes is transforming an industry, which historically did not commit sufficient resources to managing client relationships. “Managers are finding that the answer lies in taking a more rigorous approach to understanding and managing aspects of client service beyond the performance. This is a fundamental shift in the widespread belief that performance was the only thing that mattered. While it is clear that no client-investor will put up with consistent under-performance, those new firms who want to attract money as well as those established firms who want ‘stickier’ money would be wise to invest in understanding better how to manage and communicate with their client base. Put simply, funds should take a more Client Centric approach.”
What does this Client Centric approach comprise?
Recent analysis by the team at Gulland Padfield, suggests that a Hedge Fund manager should incorporate the following four elements to become more Client Centric.
1. Add a dimension to the communication of strategy and performance analysis
Investors no longer expect Hedge Fund managers to provide them with just a monthly performance figure. They must now produce regular reports on a fund disclosing the full range of return and risk statistics as well as qualitative feedback on the portfolio. However beyond the regular newsletter does a client really understand how the investment strategy is evolving? Of course managers need to strike the right balance between providing sufficient transparency and divulging too much information. However, establishing a formal, regular dialogue with your clients, with more detailed analysis of attribution and investment objectives, will maintain trust and help you retain assets.
2. Know your clients and their objectives
A Hedge Fund manager should be able to identify all potential investors who understand and are comfortable with a fund’s investment strategy and its risks. Securing the right investor base is critical to building and maintaining a sustainable franchise. However, a manager should also know all the reasons behind an investor’s decision to allocate to a fund and why it was selected ahead of similar strategies. These could include the fund’s unique investment approach, the quality of the manager’s personnel, or its superior operational infrastructure. Knowing how your fund is performing against all your client’s quantitative and qualitative measures will help you draw up strategies for growing assets and retaining them during inevitable periods of poor performance.
3. Demonstrate a commitment to invest in the firm’s operational infrastructure
All Hedge Fund managers must conform to certain minimum standards of operational infrastructure. However, in order to grow assets substantially asset allocators will expect managers to maintain best-in-class infrastructure through consistent investment in technology and staff. On-going assessments of the quality of its human capital across the portfolio management, risk management and operations areas of the business are standard practice. Investors also want additional assurances that the performance of their funds cannot be jeopardised by an operational failure or personnel change. Many managers are unaware of exactly where the client-investor expects improvements with the result that upgrades to the service and platform are poorly targeted.
4. Listen to your clients and incorporate their views
Managers should regularly seek to capture the views and perspectives of their clients. Few do this in a rigorous or structured way as part of an Investor Relations program approach. Instead, informal conversations and anecdotal evidence is deemed to be adequate. A more structure approach involving client relationship interviews would enable managers to capture the very valuable insights that many investors have into the macroeconomic landscape, and the investment strategies and industry trends of their hedge fund clients. Managers should tap into this rich source of information to add value to their own business. The conclusion? Make sure your investor relations team is not just performing a sales function, but that is gathering information for you too.
For some funds, it takes a redemption notice for them to open a proper dialogue with their clients. Many in the industry see this and are focusing on how to engage with clients and align their service to the current and emerging needs.
About Gulland Padfield in the Hedge Fund sector
Our teams support and advise senior management of Hedge Funds on the design and implementation of Client Centric strategies. We can assist your firm with the following:
- Investor perception studies: We partner with Hedge Funds to provide an independent assessment of your business across a range of themes from the perspective of its clients. We help you to develop a deeper understanding of your client-investors and their needs to identify growth opportunities.
- Client relationship management: We take a fresh approach to support your organisation’s renewal of its client-investor relationship program and partner with firms to help them win, keep and deepen key relationships. We also advise organisations on the appropriate investor service standards.
- Business strategy: We partner with your organisation to provide greater insights into your positioning within the investor community. We help you to structure a more tactical business development program built around a clarified market proposition.
Next steps
To discuss how Gulland Padfield can help your Hedge Fund organization develop a more Client Centric strategy, or develop an client relatioinship management approach that will gather insights and intelligence for your fund, email us at contact@gullandpadfield.com.
If you are interested to assess how Client Centric your firm currently is, visit our on-line diagnostic for management teams. It comprises 12 questions, takes 5 minutes to complete and enables you to compare your views in ‘real time’ against an anonymised benchmark of other managers in your sector and region. Please visit www.clientcentricindex.com. It’s the first step on the route to become Client Centric.
About Gulland Padfield
Gulland Padfield provides strategic advice, interim management and consulting services to organisations in Financial Services, Business Services and Professional Services. For over 12 years, our partners and consultants have worked with many of the leading banks, wealth managers, the global law and accountancy firms on Growth achieved through a Client Centric approach to strategy. For more information, visit www.gullandpadfield.com
* Source: HFR Press Release 13 Sept 2012