Capital has always been a blessing and a curse for the hedge fund industry. Without it, you can't begin deploying it and with too much of it, returns revert to the mean. Entrepreneurial portfolio managers seek money to back their new funds and try all kinds of fundraising activities to capitalize their investment strategies. From hitting up old employers, tapping friends and families, or embarking on roadshows, raising a fund can be a massive marketing campaign. One manager recently turned to the Internet, wrote up an investment thesis on a website and landed $20 million for his Houston-based commodity fund.
A cottage industry of hedge fund marketers grew up to assist portfolio managers in fundraising. This worked really well 15 years ago when there were just a couple of hundreds of hedge funds. Marketers knew their investors well enough to pair them together with a new manager. Investors valued third-party marketers (3PMs) because they need help to find promising small funds (in a study conducted by Pertrac, smaller funds outperformed larger ones 13 out of 16 years).
The business model of hedge fund 3PMs makes it easy for a new fund to begin raising money. Typically, no money changes hands and the economics of the fund raising are split between the fund manager and the marketer (marketers can receive 20% of management and incentive fees). But, by 2015, there were over 10,000 hedge funds globally, a record for the industry. With few barriers to entry, a lot of people entered the 3PM space, hawking all kinds funds and managers, and making it harder to matchmake. Roadshows that
In some way, this dynamic — managers hiring agents to rep their fundraising — has strengthened the need to have a top quality marketing firm in order to cut through all the noise. The revenue model of splitting fees on AUM also makes it hard for a manager to assess whether he's getting the best out of his marketing firm. “It's really hard on a marketer — to work months without getting paid,” explained Ole Rollag, who runs Murano Systems, a research company that connects investors with managers. “This has made 3PM a transitory job for many. They end up leaving the industry and that's really hurt the idea of 3PM.”
Murano has a different approach. While Murano still gets paid by the funds it represents, in a way, Rollag's firm has aligned itself more on the side of the investor. Murano employs more than 20 full time researchers in London and NYC to work with investors to better profile their strategies, goals, and needs in deploying their capital. “We're much more similar to a dating service,” Rollag said. “We're listening to allocators and taking cold-calls away from these investors.”
To help its clients be more efficient with its fundraising, Murano has pioneered a new type of CRM. Built on top Sugar CRM, a popular open source contact manager, the firm built tools that enable its in-house researchers to push out profiles of appropriate investors to individual clients. According to Rollag, this one-way sync hadn't been done before and he's working to apply for a patent on the technology. Murano is also currently in the process of developing a proprietary index that measures institutional intentions, based on the real-time insights their analysts collect on a daily basis. Rollag estimates there are about 30,000 total allocators out there and on behalf of its 70-something clients, Murano's team of researchers has spoken to 15,000 of them.
Like many firms in finance, Rollag's firm is a hybrid — using "old world" technologies (telephones and email) to aggregate and extrapolate "big data" insights that cannot be obtained through any other means. Murano is currently working with some quants from Oxford to ensure that the underlying analytics and accuracy of the Index are based on rigorous methodologies. Murano believes that, because this Index is based on real-time investment intentions, that “it will be unlike any other benchmark, and a valid barometer of market momentum and asset class preferences”.
Other firms are addressing the matching of supply and demand of institutional capital with appropriate investment strategies. Harvest (read/listen to our interview with Harvest's CEO) helps fund managers connect directly with investors using investment content as the communication medium. The company claims to have 8000 of the world's top investment firms on its platform.
Prequin is widely used in the 3PM business and bills itself as the most comprehensive database in the alternative assets industry servicing private equity, hedge funds, and real estate.
“This is an industry, for the most part, that doesn't use electronic solutions,” Murano's Rollag concluded. “In some way, though, the old fashioned way is still the most efficient. It just needs to be enabled with technology.”