True story. I remember telling a Polish joke to a German friend of mine. He didn’t laugh and didn’t get it. I explained that when you’re from Milwaukee, you get a minimum of two Polish jokes a week and probably more if you’re actually Polish. He said it would have been funny had I switched Polish to Swiss. And so I learned, you’ve got to know your audience.
It’s like that for fund managers too. Jokes aside, its critical to strike the right tone with the right information with the right punchline. Pitching to an individual or “retail audience” is much different from pitching to an allocator or institutional investor. This is tricky for fund managers and managed fund managers who sometimes have one product that needs to be explained in different ways for the different audiences.
The good news is most funds understand who their audience is before they start selling. Many emerging managers are comfortable pitching to friends and family and then targeting a broader retail or small family office customer base. Pitching to a large-scale allocator or institution is going to be much different.
Sol Waksman, founder and president of BarclayHedge fund data and research, has seen thousands of funds over his 30-plus years in the sector. For him the first element is the most crucial for any potential investor.
“The first thing you need to recognize is that it’s a leap of faith,” Waksman said. “They are looking to see if they like you in the first minute or two because they have to trust you.”
To get potential clients to trust you means you gotta know them too.
For retail investors, that leap of faith is often grounded in the fund’s foundations. A thorough and straight-forward explanation of how the fund was created, tested, and proven will go a long way toward convincing them that you are the investment strategy they want and need.
“If you are talking to retail customers, they are interested in all the hard work you put into building the strategy,” Waksman said. “And they don’t want a gimmick.”
What that means is fund managers should explain the concept, how they built it, the strategy and how it is executed via algorithm or by the trader. Tell them how much research and development went into the fund, how much backtesting was done and the basis for what the fund is about. Explaining in plain English, the philosophy and grounding of the fund is helpful too.
For example, the XYZ fund is a unique long-short energy strategy that is designed to identify trends in rising and falling markets. John Smith and Sally Johnson spent more than 15 years trading crude oil and natural gas for commercial trading desks and developed this fully-automated trading strategy for their fund over the past three years, back-testing and investing their own capital in live markets. It is non-correlated with the S&P and is aimed at providing a cushion in bearish equity markets.
Now you have a simple statement that tells investors what your fund is and what your strategy is all about. It will help serve as your elevator pitch as well.
Pitching to institutional customers is different. Yes, a concise pitch of the fund and who you are is a must. But such investors are likely more interested in what differentiates the strategy from another and the intricacies related to it. And while trend following may be a solid approach to the market, articulating what makes your trend-following strategy different or unique is imperative.
And as you explain your strategy, the volatility in the fund, drawdowns and other aspects of the fund, you may have to answer some difficult questions. Waksman recalled the late Liz Cheval of EMC Capital who often asked the question “Are you comfortable with that?” both as a trader and investor. Balancing the goal of generating profits with inevitable losses has to be within an investor’s risk tolerance. Explaining why you had a drawdown, or even less of a drawdown than your peers, is important information for institutional investors and allocators. (See article on Your Unique Selling Point) Having no explanation for profits or losses may be the end of the conversation with an institution.
Beyond trading and strategy, Waksman said institutions go far deeper.
“They’re all the about the process,” Waksman said.
That means they are interested in how the trading and fund’s operations work. Emerging managers may not have a team of researchers, nor an IT staff to develop new AI strategies. But institutional clients will want to know who is managing the trading and who assists when that key manager isn’t there. Who handles your accounting, reporting, legal and compliance, your brokerage firm for clearing and execution? Institutions are interested in finding and trusting a firm that has all the infrastructure to operate and communicate with investors.
Even for newer firms, they want to know what the business plan is. In other words, they want to know that you plan to be around for the years to come and what that vision looks like.
“They want to know what your plans are to build for the future,” Waksman said. “And they want to know if you hit a certain AUM, will you add another trader or programmer or CFO?”
Waksman said there are no funds that appeal to every investor. Emerging managers should not be turned off by institutions or individuals who decide to take a pass. But investors, big and small are looking for a fund manager they can connect with and build a strong relationship with. That comes from the first handshake and introduction.
“Be yourself and be honest,” he says.
Every audience will appreciate that.