By Justin Meise
Most likely everything you have read this year about the impact of the JOBS Act for hedge funds has missed the point completely. The phrase “lift the ban on advertising” has focused the discussion on a single communications tactic while completely overlooking the real potential opportunity for hedge funds: the ability to take a strategic communications approach to compete on a level playing field with traditional managers.
Hedge funds have obviously been limited in their ability to communicate with investors while traditional managers have used strategic communications to build strong brands, establish their expertise and pedigree with thought leadership and provide investors with greater transparency. But why should hedge funds care, let along change?
For hedge funds to attract large pools of money, they will increasingly need to be more institutional and transparent with all investors. According to The Evolution of the Industry: 2012, an annual KPMG/AIMA hedge fund survey, investors are demanding hedge funds look and act more like traditional institutional managers from an operational standpoint. Further, 82% of respondents reported an increase in demand for transparency from investors.
The study also reports that institutional investors now represent a clear majority of all assets under management by the global hedge fund industry, with 57% of the industry’s AUM residing in this category. And, the proportion of hedge fund industry assets originating from institutional investors has grown significantly since the financial crisis.
Our own experience consulting with hedge funds and traditional managers has confirmed other indications of this trend, as well as with all investors—large and small—demanding greater operational efficiency, cost reduction and models that enhance overall risk management, such as the move from single to multi-prime relationships, all delivered in an open and transparent way.
This further institutionalization is a significant cultural shift for hedge funds. Not only do many firms lack a strategic communications infrastructure, but the concept of such openness still runs contrary to the DNA of most firms. Hedge funds that fail to take a proactive approach to managing their brands in this new environment may be left behind as competitors will use the new rules to reap the benefits of aggressively and positively articulating their value proposition. Attempts to fly under the radar will likely backfire as many hedge funds will be forced to participate in more open discussion.
Kathleen Powers Dunlap, managing director at Barclays, agrees: “The Jobs Act has the potential to be a genuine game changer. To be sure, some large funds will continue to rely heavily on a cultivated mystique of exclusivity to drive investor interest. But others will seize the opportunity to open up the marketing playbook. These firms will incorporate the strategic communications best practices perfected by the traditional institutional manager community and compete for visibility with institutional investors of all channels: pensions, insurance companies, endowments & foundations, family offices, RIAs and wealth platforms.”
Hedge funds will need to adopt the approach taken by many successful institutional mangers who take a systematic and thoughtful approach to articulating a firm’s brand for a variety of purposes, including: managing a firm’s reputation through crisis; building awareness to drive fundraising; or communicating a significant change, such as a launch, acquisition or merger. They also utilize a broad range of activities for touching all of a firm’s audiences, including: employees; investors; consultants; media; counterparties/vendors and other industry participants.
Strategic Communications: Opening the Playbook
While the SEC has said it will not provide its guidance until later this year, hedge funds will almost certainly have a wider range of tactics at their disposal. The lifting of the “advertising ban” will likely include most forms of marketing communications, including: media relations; web strategy; marketing collateral; advertising; event marketing and event speaking. This dramatically opens the playbook and will potentially allow hedge funds to take much greater control of their messaging and branding with all of their audiences.
Some examples of this broader playbook include:
Branding – A strong brand increases market awareness, placing firms in more searches. A well-managed brand enables firms to more effectively communicate their value proposition, eliminates common objections and ultimately can enhance client loyalty and retention.
Websites – Almost certainly, hedge funds can now move beyond the industry standard “client log in” page to provide some basic information on a firm’s pedigree and general area of investment focus and begin to communicate points of differentiation. This is critical today when many investors do their initial research via computer or mobile devices.
Public Relations – It is doubtful the SEC will offer hedge funds carte blanche to discuss performance, but it is very likely that hedge funds will be freer to discuss their investment philosophies in general and create visibility through media relation staples, such as thought leadership and investment commentary. This freedom offers hedge funds a greater ability to form relationships and educate the media. This is particularly important for a long term crisis/reputation management strategy.
Advertising – Flip through the major institutional trade magazines and you will see traditional managers promoting their brands and range of investment strategies. Few rarely tout performance or reveal trading secrets, but the advertising is effective at establishing awareness, credibility and relevance.
Direct Communications – Similar to the advertising approach of traditional managers, hedge funds can be more aggressive while communicating with target audiences. It is difficult to predict what will be permitted, since the scope of direct communications is almost certainly an area the SEC will address with granularity due to the range of suitability issues.
Events – Hedge fund managers can likely move beyond the narrow range of hedge fund-specific events to participate in broader institutional events in a more meaningful way.
As firms continue to adapt to a newly competitive investment, technology and regulatory landscape, they must recognize their communications strategy as an equally critical component for success. Effective communication of a firm’s value will become almost as critical to investors’ decision-making process as investment, operational and risk management.
There are certainly some unknowns as we await the SEC’s response. But—make no mistake—change is coming to the hedge fund community. Winning firms will embrace this change, not resist it. Firms that take a strategic and proactive approach to managing their marketing communications will be better positioned to compete against their peers as well as traditional managers.
Justin Meise is a partner at River Communications, a NY-based PR firm specializing in public relations and marketing for financial services firms.