Gone are the days when GPs controlled the flow of information.
Performance justified everything – high fees, large bonuses, a degree of eccentricity. It even justified statements like this one:
“The PM won’t get out of bed for anyone with less than a hundred million to invest”.
This was told to me by an immensely proud and thoroughly delighted marketer. I wasn’t an allocator (I was publisher of a hedge fund magazine). And I hadn’t even asked to meet the manager!
He just wanted to tell me.
And this was typical of the hedge fund industry pre-financial crisis, back when the best funds were all at capacity. It was a time when LPs would boast about the funds they had managed to get access to.
But that world has gone.
The AUM of that proud marketer’s firm when we spoke? Several billion dollars.
Five years later? It was under ten percent of that.
This firm, like many others, thought their performance was so good, they could act however they pleased and the money would stick with them. And they were right, for a time.
When performance softened after the 2008 financial crisis, that changed.
Investors left in droves, and they haemorrhaged capital.
The firm in question has been recovering of late. Perhaps it has learnt its lesson?
After all, on its website under “culture”, it cites ‘humility’ as the bedrock of its philosophy…
Performance must not drive messaging
Performance is still essential – you cannot regularly perform poorly and maintain investor confidence. But we need to shift messaging away from performance and focus instead on the drivers of that performance:
- If you cannot explain why you outperform, LPs will have a hard time believing your outperformance is repeatable
- Performance is the one thing you absolutely cannot guarantee. Most investors are highly sophisticated, and you will only erode their trust by making promises around performance
- For open-ended alternatives funds, how much "hot money" do you want coming into the fund? Investors that came in just because of performance have no reason to stick around if it softens – even momentarily
It's time to face the truth:
Focusing on performance, no matter how strong, won't get you the long-term assets you're chasing.
… because performance is not driving allocations
The most successful funds are not the best-performing funds, they're the best prepared. They understand that the information advantage now rests entirely with the LP – they are putting resources into making that all-important first impression.
It may feel unfair, but being top quartile is no guarantee of fundraising success.
Performance remains important, but it’s not enough. You need to articulate what really differentiates your offering.
And you should zero in on the clients who this will most appeal to.
Start by really understanding who your ideal investors are. Everything begins with that.
It's where we begin when we start our journey with a new client. Get in touch with Jon Greene and find out how we can help you discover what makes your fund unique.
