From the October 2013 issue of Futures Magazine • Subscribe!

Is your fund business and governance ready?

Professionals need only apply

For How to build a business plan by Diane Mix Birnberg.

Hey, emerging managers, when you give your elevator speech to a client, what does it include? 

Chances are you’ve perfected your pitch, talking about your trading philosophy and how it is different and, of course, it probably includes your stellar track record. And if it’s not stellar, you’ve found a way to explain why it isn’t...yet. 

But alas, that pitch won’t get allocators’ attention, let alone their money. Allocators are looking for reasons to say “not interested” or “oh, ok, thanks.” 

So how can you make a lasting impression? What really matters to an allocator? 

Allocators want to know that you’re running a business — a real business. They want to know that this isn’t just a hobby for you and that their investment is in sound hands. They need to know  you put in just as much time attending to the details of  your business as you do to your trading. You can have the greatest track record in the world, but if you don’t have the right processes in place to check your trades, resolve discrepancies, oversee your clients and employees and ensure that you have proper backup procedures, you can end up putting your allocator’s money at greater risk because of operational errors and even compliance issues. 

Joyce E. Heinzerling, managing member of Meridian Fund Advisers LLC, recently did a study on hedge fund governance, commenting, “Best practices are increasingly becoming an advantage for raising capital from institutional investors who now represent [more than] 70% of the global hedge fund asset base, according to Hedge Fund Research Inc.’s latest global industry report (see HFR Global Hedge Fund Industry Report -Q3 2012).” 

Supporting this, she cites a survey of institutional hedge fund investors by consultancy group Carne Global Financial Services that revealed that 91% of allocators to hedge funds reported they would decide against investing in funds that did not meet their governance criteria. 

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