Hi all,
I hope you're well.
By way of background, I recently (1 year ago) transitioned into a small hedge fund (sub $50M in AUM) with a unique event-driven/special sits strategy (I won't say too much more for privacy purposes, but there are not a lot of funds that do what we do). Because our fund is lean, I do a range of stuff from investments (my main role) to capital raising.
My PM has managed our fund since the early to mid 2000's, but never really made a push to grow the fund from inception for personal reasons. This being said, we have a 10+ track record of throwing out annualized double digit returns.
As of late, we've been actively trying to raise capital because my PM has had a change of heart and sees our fund as having a $300M AUM capacity.
To raise capital, I've been digging into my personal network, exploring service providers like prime brokers, asking for referrals, networking, putting together investor dinners, and even talking to third party marketing guys. Unfortunately, due to a recent lag in performance and our unique situation (having a long track record with little AUM), a lot of third party marketing guys aren't incentivized to help us, and we don't have $10k a month to pay retainers. We're actively targeting family offices/HNW to build AUM, but aside from a few early conversations, we don't have anything solid in place.
Does anyone here have any tips/advice they can share? Feel like we've hit a wall with most of our options and I really want to turn this fund into something great.
Thanks guys/gals.
Are you the only analyst on the team? Maybe tag team with other team member?
Yes indeed--sole analyst on the team. Would be hard to tag team with the PM since he's actively monitoring positions/pulling the trigger on the daily. Capacity is also something we're hoping to expand with more AUM.
targeting family offices and HNW individuals takes a long time, and is a full time job...i've heard the expected hit rate is something like 10% for a great fund strategy (so, 1 out of 10 pitches gets $$....so you are raising 1-2mm at a time....thats a full time job to raise 100mm). With your track record, you could join one of the multi-manager shops to get access to large slug of capital quickly, but you would be giving up economics to do so. You might be able to negotiate better economics because of your track record, but you'd still be giving up something.
You're absolutely right....HNW/FO capital raising is long and relatively difficult. I think you're right regarding the multi-manager shops; it's a concept we've discussed. Always tough giving up economics but at the end of the day you have to do what you have to do...
It was largely word of mouth. My PM told a few of his friends who told their friends, and it was somewhat of a domino effect.
We've never actively marketed the fund until recent.
I recommend you spend your energy on securing a good placement agent rather than on securing fund commitments on your own.
For instance, you may spend 30 hours prospecting 12 qualified meetings in the family office world. You then spend 18-24 hours actually doing those meetings, and let's call it 6 on following up. That's ~60 hours for 12 meetings.
Who knows what your hit rate in those meetings will be. It's likely low. Family offices are notoriously tricky to get commitments from. The commitments you do will be small slugs, and they're likely to not be too sticky.
Alternatively, you could spend 30 hours doing half-hour phone screens with 60 different placement agents: the capital raising teams at bulge bracket banks, the same at middle market banks, the specialist boutiques, and the lone-man practitioners that do this for a living as solo players.
Anyone that mutually wants to do a meeting after that half-hour call is a very warm lead, so if you have a 1:10 conversion rate, you can spend 2 hours in meetings with the 6 that make it through and do a deep-dive. That's a total of 42 hours spent, and each of them is now a lead-generating asset for you.
You get to go hands-off, more or less, and let them do their work. Assuming they're cool with signing non-exclusive contracts, they can all go to work.
Incentivize them with good economics. Don't touch the carry, but give something like double the current market rate on management fee income. Seriously.
I'm not sure what goes today in the hedge fund world, but if it's normally two points paid out over two years, offer four points paid out over six years. Have a lawyer help you draft it such that there's schedule termination if the LP leaves too soon, but the point is that you need to make someone feel economically compelled to invest the time in getting you LPs.
This way you make your life easier and also better.
Thanks for breaking this down--the way you laid out your thoughts makes a ton of sense, and puts into perspective the faults of what we've been doing. I agree; given our capacity constraints, outsourcing the investor outreach makes perfect sense.
I also love the idea of incentives re: enhancing economics. Again, this was something I haven't thought about, and it's particularly compelling given our small fund size (and a point of pushback for a lot of the placement agents).
Thanks again for the awesome feedback.
your prime broker likely has a capital introduction program to match clients with investments. you could try that. Honestly a 300M capacity is not big enough for most medium to large sources of capital in my experience. The Millenniums of the world want to start at 500M and scale up from there. For smaller sums you can try to put up your firm's capital at first loss providers hoping to perform well enough for them to make a non first-loss allocation.
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