By Thomas S. Kreitler
Institutional capital is flowing into hedge funds
at a record pace. Unfortunately for newer, smaller fund
managers, most of that capital is going to the very largest
managers. Investors often cite an established track record,
stability of team, and firm-wide infrastructure for their
decision to allocate to larger managers.
The good news for the newer, smaller crowd is that
there are a growing number of hedge fund investors who are
willing to look beyond the established few. In the past, this
new manager discovery was the purview of hedge funds of funds
and family offices, but today many forward-thinking endowments,
foundations and pension funds are open minded about younger
What does it take for a newer manager to draw the
interest of a large institutional investor? Important criteria
include great returns, a strong and stable team, a highly
differentiated strategy, coherent and repeatable investment
process, a significant GP investment in the fund, and an
institutional infrastructure with highly recognizable service
If a manager can check all of these boxes (and only
a small fraction of hedge funds truly can), they then need to
ask themselves whether they can confidently provide repeatable,
attractive risk-adjusted returns to investors while doing the
heavy lifting required for an effective fund-raise. Assuming
the answer to this question is "yes," a manager must know the
proper way to approach and communicate with potential
Since the 2008 financial crisis, hedge fund
investors are increasingly demanding more from their managers.
They often look for managers who understand and respond to
their specific investment needs. They want their managers to be
approachable partners with high levels of transparency who have
open lines of communication. Managers should emphasize their
transparency, open process, and client service
How a fund manager introduces themselves to an
investor is critical to their success. In the first meeting, a
manager must provide a succinct understanding of their
investment approach and be able to relate that process clearly
and quickly. This pitch can be broken down into the following
steps: an introduction, a discussion of the firm’s
background and team, identification of the market opportunity
upon which the strategy is focused, a definition of the
strategy highlighting it’s differentiation from
others, an illustration of a repeatable investment process to
include portfolio construction, and a discussion of the
firm’s institutional infrastructure.
There are a number of common mistakes managers
typically make in these initial presentations. One is when the
manager feels compelled to prematurely go "deep into the weeds"
with their strategy, describing individual trades before
providing the high level approach mentioned above. Investors
are less inclined to invest with a group of smart people who
put on a bunch of good trades as opposed to a team that follows
a proven, repeatable process for alpha generation.
Another mistake is that managers forget to tailor
the pitch to the needs of the prospective investor, and they
include information in their presentation that is irrelevant.
For example, a non-taxable investor is not likely to care about
the manager's tax efficient trading style. Investors often meet
with multiple managers in a single day, and wasting their time
with unimportant information can be a significant mistake.
A final common, but critical, mistake happens when
managers ignore questions or give half-baked answers to said
questions. A manager should embrace investor questions (if
they've done their research, these should be anticipated in
advance) and offer candid, appropriate responses. For example,
if an investor asks how large the GP investment is in their
fund, a manager should give them a specific number rather than
a vague or evasive answer.
The bar is quite high for newer managers to succeed
in raising institutional capital. Managers need to understand
their prospective investors’ needs and clearly
articulate their ability to generate strong risk-adjusted
returns to satisfy those needs. They need to candidly and
logically describe their team expertise, the market
opportunity, a repeatable investment process, and an
institutional infrastructure. Above all, a manager needs to be
likeable. Underlying the criteria mentioned above, investors
typically do business with people that they like.
Thomas S. Kreitler is a Partner at
Eaton Partners, a global placement agent. He leads the hedge
fund/liquid strategies team at the firm.