For so many hedge funds and managed futures firms, telling potential clients what makes them unique, special and a must-have in a portfolio is a baffling exercise.
Many fall back on the concept that they make money when everyone else is losing cash. But the fact is, 2008 is coming up on a decade ago. Leaning on the global financial crisis as your unique selling proposition probably won’t cut it for new investors. They want fund managers to answer the question: what makes you unique right now? It’s a fair question and one that should force every fund manager to think, and perhaps even start there. That answer is often the essence of an elevator pitch or cornerstone of the pitchbook.
To answer this question, firms need to look at the layers that make up the fund from: the strategy to the people behind it. What is it that gives you the edge over the competition? If you can define your unique selling proposition for clients, chances are you’re already ahead of the pack.
Todd Fulton, senior vice president, capital introduction at RJ O’Brien in Chicago, has spent years listening to commodity trading advisors pitch their funds, in search of those precious few who really know their strategy, the market and what makes them different than the rest.
Give Me A Reason
For him, one of his key questions is: “What makes you different or better than this other CTA which trades the same markets, using the same basic strategy with the same basic approach?” The answer he doesn’t want to hear is that it is impossible to compare because they don’t know the inner workings of the other fund.
“Their standard answer is, “I can’t tell you we’re better than XYZ trading because that would require an intimate knowledge of what XYZ is doing,” Fulton says. “It sounds like a responsible answer but it’s a cop-out. They don’t realize they are not serving themselves well.”
A new fund with a trend following strategy needs to set its differentiation bar extremely high because allocators and investors like Fulton have literally seen thousands of them. Smaller start-up trend following firms are faced with the challenge of making the case for themselves over behemoth funds that do the same thing.
“Why wouldn’t I give my money to Eckhardt Trading, who has a 30-year track record, more money under management as opposed to you?” he said. “Give me a reason here. I know you don’t have access to their models but you do know they got smacked down, say in February for X-percent and you only got hit for X-percent. Please offer some color on why you think that might have happened.”
This is the Q&A gauntlet that smaller and newer fund managers must face when bringing a product to the marketplace. It’s not easy, but knowing your product and the competition around you will certainly help differentiate one fund from the rest.
The growth of systematic trading strategies leaves some firms unsure of how best to explain themselves. Trying to explain how a black box algo identifies trades, entries and exits using various statistical models or mathematical techniques is hard. It also creates the dilemma of explaining the strategy and execution versus giving away the so-called “secret sauce.”
So how do funds get around that? Fulton recommends an explanation using a scenario that illustrates the validity of the strategy, and gives the investor the value proposition for the fund. If you can explain what the strategy’s impact is for clients, you may have found the words for what truly makes you unique.
“Once you’ve talked enough about how your model works, then you have to shift toward what the impact is,” he says. “You may tell them that you have two moving average crossovers and they are over different time periods. Then say, “The reason I use these two time frames is because it helps us avoid X and exploit Y, and here’s an example.” You don’t need to tell them the numbers but what effect it brings to the table.”
Tell Me, Who Are You?
A firm’s defining attribute may be its manager and that presents an opportunity and challenge. For many allocators, pedigree matters somewhat but it is rarely the thing that attracts money to the fund. Of course, a fund is only as good as the traders who create it and build it. Where you came from will only get you so far in Fulton’s eyes and it is pretty rare that it is the unique selling point.
“I’ve known great traders with triple-doctoral degrees and I’ve known great traders who used to be taxi drivers,” he says.
A fund founder must be balanced in his view and able to answer the question of what happens to the fund if something happens to him or her. Founders also should surround themselves with talented individuals who may help operate the fund and innovate in the coming months and years.
Firms who can identify that unique selling point will soon find that all the other marketing pieces fall into place – what you do, how you do it, what markets you trade and how you impact a portfolio.
And then you very well may find a client who thinks you are special.