The Truth About Hedge Fund Marketing
In this article, we walk you though ways to prove your value to your investors instead of making simple, vague claims.¬†
How many times have you heard these statements from fund managers or read them in marketing materials?
- We deliver superior risk-adjusted returns
- We generate alpha across market and industry cycles
- We excel at diverse skills like position sizing
How many times have those statements been accompanied by facts? If so, were the facts a good illustration of their past, current, or future investment performance?
Probably not often, and if they were, they probably highlighted past performance. While hedge fund investors understand what constitutes investment acumen, very few have the right tools to measure it accurately. The market is still largely missing the tools needed to evaluate and quantify investment skill beyond the age-old return-based approach.
At Novus, we help clients create transparent and potent messaging that reflects their true investing expertise. Quantifying your skills is a lot more powerful than just talking about them.
Don’t Follow the Crowd
This is what any hedge fund manager would expect to be asked by a sophisticated investor: “How much alpha have you generated in your key sectors?”
However, we like asking questions that go beyond performance and top-level alpha figures, such as:
- How much exposure have you historically had in your key sectors and how has it shifted through market regimes?
- What has your Return on Invested Capital been on the long and short sides at different time periods? Have you generated alpha—not just returns—in those sectors?
- Has alpha been driven by a couple of names or across all your positions?”
And to fully understand a manager’s strategy and portfolio, we go as far as asking the following: are your key sectors’ positions the same as the ones that your peers are holding? How crowded are they? Within your main sectors, are you better at any particular market caps or geographies? And the list goes on.
These days investors want more. They don’t want to be told things or sold things. They want to be shown, explained to, and educated.
Here’s how to make those same statements we made in the opening, but with much more credibility.
“We Deliver Superior Risk-Adjusted Returns”
This isn’t just marketing for hedge funds, this is their number one objective. But what does it really mean and how can you prove it?
It’s no longer enough to say that you’ve generated 30% cumulative returns in Information Technology over the last 5 years. If you want to make a compelling case for your Technology fund, explain why and how your performance goes beyond returns:
“We have generated 4000 bps of alpha in the long side and 1500 bps in the short side over the last 5 years in Information Technology, while the IT benchmark was down 5%. Although we’re concentrated on large and mega caps, 20% of our IT alpha comes from less common and crowded names.”
Presenting this material to prospective investors does two things. First, it illustrates your investment edge, second, it shows them that you’re thoughtful about your portfolio. You’re giving investors the idea that you monitor your process on a very granular level for the sake of improving consistently.
“We Generate Alpha Across Market and Industry Cycles”
So easy to say, but difficult to prove. Do you look at benchmark returns and compare them to your sector returns? Do you look at market correlation, Sharpe and Sortino ratios? If so, you may want to consider the limitations of, and alternatives to, return-based analyses. It’s essential to answer key questions like whether your fund is generating alpha at the security and category level and if it’s adding value through security trading.
Especially if you have a diversified approach and shift exposures according to your macroeconomic predictions, you should carefully understand how to translate your success into the right words. Cycles are complicated, and so is timing the market. If shifting exposures opportunistically is a key part of your process, the ability to articulate it would go a long way with investors. Instead of talking about up-capture, isolate the actual value you add compared to a passive approach:
“We are experts in delivering value through our top-down approach. 85% of our beta contribution comes from selecting the right sectors at the right time. This means that, had we invested all our money purely in the market, we would have only made 113 bps last year, but because of the exposure allocation and shift decisions we generated an extra 947 bps, before any alpha contribution.”
|Gross Contribution (bps)||1080.77||133.64||947.13|
*Sector contribution in the last 5 years
“We Excel at Diverse Skills like Position Sizing”
Position sizing is one of the most fascinating skills of any investor, especially because of the different behaviors of long and short books. A good hedge fund manager or analyst needs not only to identify the most promising companies (in the case of an equity approach, for example), but also make the right decisions around top concentration and sizing optimization. If it sounds a bit more complicated than what you can cook up with some excel magic, that’s because it is.
Indeed, the position sizing skill in particular has proven to add and detract large amounts of bps. If you want to make the case that your fund does more than just betting on companies, you should quantify the particular skills you excel at:
“Compared to a hypothetical portfolio where my stocks’ sizes are constant month-over-month, I have added 3,898 bps of contribution in the last 5 years by actively playing with position sizing within my portfolio. Moreover, the Return on Invested Capital is ~10% higher in the larger positions due to our high-conviction approach.”
Hedge funds don’t have to actively advertise online and in the media, but should give importance to their marketing efforts. Investor Relations departments already do so, but not yet in the right way. If you want to differentiate yourself between the hedge fund next door, you have to start by understanding what you’re good at and how to deliver your message effectively.
Investing is an art that not many can master. Show us your painting.
A portfolio manager makes multiple decisions when managing capital, such as picking which securities to invest in, which geographies to allocate to, how to size each position, and how long to hold each position in the portfolio. All of these decisions impact returns and are a great window into a manager’s true investment acumen.
The win/loss ratio is a metric that helps quantify the efficacy of two critical decisions for managers: the sizing of trades and the timing of exits out of trades. In layman’s terms the win/loss ratio measures (on average) how much a manager makes when they’re right versus how much they lose when they’re wrong.
In this guide, we’ll focus on some basic observations and properties of the win/loss ratio. Download our latest guide for the most authoritative walkthrough of win/loss ratio and its applications.
What does the guide cover?
- How win/loss ratio is calculated
- Why it helps evaluate a portfolio
- Ways to improve win/loss ratio
- How win/loss ratio relates to batting average
Download our latest report to learn more.