Hedge funds can relate vivid stories about security selection, conviction, market timing, category allocation, and trading.
It may be basic stuff for anyone who’s ever taken Journalism 101, but the adage “show, don’t tell” is one of the most enduring pieces of advice a writer will get. Telling the reader that “the traders on the equities desk were hungry” or even “ravenous” isn’t nearly as effective as writing, “they attacked the pizza like they’d gotten a tip on a famine.” The former is “telling” while the latter is “showing,” and as any university writing instructor will tell you, it’s a far more effective way to make an impression on your audience.
Here’s the thing: that very instruction has applications beyond writing, including oddly enough, hedge fund marketing.
Last year, we published a piece titled An Allocator’s View on Effective Hedge Fund Marketing: Part 1, which explored some elements of the courting process that occurs between allocators and hedge funds. In it, we presented a table of five skill sets hedge fund managers can employ to decompose their returns during the diligence process allocators undertake when interviewing hedge funds. Here, we’ll expand on each skill with a distinction between telling and showing.
Telling: “We know our companies better than anyone.” Whether it’s this, or some variation of the phrasing involving “kicked tires” or “deep diving” nearly every single manager uses this as a selling point. As any allocator will tell you, however, it’s not a differentiating point because everyone tells them that.
Showing: “90% of the alpha we’ve created in the last three years can be attributed to security selection.” Or “We’ve created alpha through security selection in 31 of the last 36 months, including 7 of 8 months the SPX declined.”
Telling: “When everything lines up, we’re not afraid to take big bets.”
Showing: “We’ve never had a year when an equally-weighted portfolio would have bettered our actual performance.”
Telling: “We don’t try to time the market.” (Allocators hear this almost as often as “we know our companies better than anyone.”)
Showing: “As evidenced by the miniscule standard deviation of our daily exposure changes, our net exposure – on both a notional and beta-adjusted level – moves very little on a daily basis.” Or “While we infrequently employ the tactic, when we strategically shifted net exposure over the last two years, it resulted in a 155 basis point pick-up versus a level-exposure portfolio.”
Telling: “We know what we’re good at and stick to it.”
Showing: “Last year, 90% of our capital was allocated to three sectors which accounted for 94% of our P&L and 92% of our alpha.”
Telling: “We have limited portfolio turnover.”
Showing: “While we’d love to only come to work two days a month, in 22 of the last 36 months we created value with our intra-month actions.” Further, “When measured against a non-turnover portfolio on both a monthly and weekly basis, our intra-month and intra-week trading decisions are consistently additive. In this way, we actively monitor the opportunity costs of our decisions.”
In speaking with our allocator clients, some of America’s largest endowments, pension plans, etc., we’ve learned that a differentiated marketing pitch is crucial for managers, especially those in the “emerging” space. But if you’re a manager you can’t “show” an allocator what you’re good at, or what your unique skill sets are without the tools to measure and display them.
At Novus we don’t just empower managers to identify the source of “uniqueness” in their returns, we work with them to craft custom pitches. For help analyzing your skills sets contact us at firstname.lastname@example.org.Published on February 10, 2015