Investor relations teams put emphasis on transparency and information for investors

Investor relations is considered a vital aspect of single manager hedge fund and funds of hedge fund services. Increased demands for transparency and detailed reporting are now common.

Investor relations has become more concentrated on providing detailed, relevant and up-to-date information for investors who are more focused on detail and transparency following the financial crisis. To cope with the extra demands, investor relations teams need not only technology but also people to build and maintain client relationships.

Melissa Carnathan, managing director responsible for investor relations at US global macro specialist Armored Wolf founded in early 2009, says the process of professionalising investor relations began before the financial crisis. The process has accelerated over the last two years, believes Carnathan.

From the beginning Armored Wolf took investor relations seriously. “You need a full infrastructure operation. You need all the proper service providers and that includes a good investor relations process,” says Carnathan.

Carnathan says employing a sizeable team from the outset has paid off. “We launched at a very difficult time for fundraising. It was still quite difficult but I think that had we not had these things in place, we would have not been able to attract money at all,” she comments.

The biggest change reported by investor relations teams is that they are now sending out far more information. A monthly newsletter outlining the fund’s performance and a manager’s macro views will not satisfy an investor’s needs or demands for transparency.

“It is a much more hands-on approach,” says Paul Bentley, head of investor relations at fund of hedge funds (FoHF) Liongate Capital Management. “In the past investors did their due diligence and then they’d watch. Now I’d say people are watching over a much more monthly, weekly or daily horizon.”

At Martin Currie, which runs a number of hedge funds as well as long-only products, global head of hedge fund sales Alastair Barrie believes the investor relations role has not changed much. Barrie says the difference now is that investors are focused on transparency.

He says instead of a handful of investors asking questions about transparency, all of them now want the information. “This focus on transparency and liquidity has increased but it hasn’t really affected us because we were already there,” he explains.

Information being asked for covers a number of areas including more transparency on a fund’s portfolio positions. This appears to be a demand from most investors regardless of strategy.

The burden put on hedge fund management companies is significant. Investors expect reports electronically. An automated system is best, according to Carnathan at Armored Wolf. However, most companies are unable to introduce such elaborate systems at launch.

As a FoHF business with $2.7 billion in assets under management (AUM), Liongate has been able to afford the technology to improve its reporting systems. Bentley says in the past two years the company has made two big “jumps” in terms of providing investor information.

The first jump in 2009 was the implementation of a new client relationship management (CRM) system for reporting to investors. Previously, all reports came from a central Liongate Capital Management email address.

The new system allows reports to be more personalised. Investors receive information from a dedicated relationship manager and reports can also be tailored geographically or for the type of recipient. For example, Bentley says investment consultants tend to want more detailed risk reports than other clients.

The second step was increasing the number of reports being produced. Bentley estimates Liongate tripled the number of reports it was sending, partly as a result of the improved system and partly due to investor demand.

The increased traffic meant the company also looked at improving the security of the information it is sending out. In addition to standard non-disclosure documents, Liongate has begun watermarking reports. Each document sent to investors is automatically marked with the recipient’s details.

“Our fear in the past was that we were worried about whose hands it would get into. I think it makes people think twice about not forwarding it on,” Bentley says. He explains that, as a FoHF, Liongate is keen to protect its portfolio of underlying funds.

Justin Perun, president of investor relations consultancy Bull and Bear Capital, notes emerging managers need to be “smarter” about how they distribute information. He suggests that password-protected websites are a good way for enabling investors to keep in touch with managers. Perun says some are already heading in this direction, although the use of technology is not universal in this particular aspect of fund management companies.

“I think we’re going to be potentially looking at more information being distributed quicker, easier and faster and these investors will be able to access this information anytime, anywhere. I think right now we’re still trying to embrace technology and find out how that fits with the rest of our operations,” Perun says.

Carnathan agrees with him. She says Armored Wolf hopes its fund administrator implements an automated reporting system for investors but in the interim is considering a password-protected website as an alternative.

At Liongate another problem confronting the investor relations team is compliance. “I have moments where I feel more like a client compliance officer,” says Bentley. He says he has to consider whether Liongate is allowed to send a particular piece of information to investors before ensuring it is provided consistently to all investors.

The extra demands on investor relations teams have driven the move towards more experienced individuals and more innovative structures.

“I think investor relations wasn’t really a concern for a lot of hedge funds for a while. I think they had people who raised capital and moved on,” says Martin Currie’s Barrie.

He believes those dealing with investors need to have a different skillset now, with a mixture of communication and investment management skills. “You can’t have a meaningful debate with a client unless you understand the circumstances in which they’re investing and what’s affecting them,” Barrie says.

Carnathan, whose own background is principally in capital introduction, agrees experience of the markets in which a hedge fund is trading is a useful tool in investor relations.

“I think the more that the marketing person understands the markets and investment process and portfolio the better they are at doing their job,” she says. “If you have somebody who’s more knowledgeable in the markets then I think you end up being able to leverage your portfolio managers better.”

Carnathan says the best investor relations managers she has come across have come from the trading or investment side of the business rather than marketing.

“To find someone that has every bit of experience is tough to do and I don’t necessarily think there’s a right or wrong answer. I think we’d rather hire someone that has the ability to develop relationships but has got knowledge of the markets. I think it’s easier to build up the contacts,” Carnathan suggests.

Bentley thinks the structure of the team is an important factor in how it handles clients’ needs. The people employed and the way they are deployed to meetings is now something investor relations managers have to consider.

“I think in the past you could do a lot of marketing where you could obtain investments by having standard investor relations or business development people,” says Bentley. “Now I would say we will rarely send an investor relations sales or business development person to a meeting without sending someone who represents the research side as well. It’s almost become essential.”

To aid this process Liongate has a product specialist, Mark Parsonson, who is “embedded” within the research team. He has no involvement in the investment process but is there to educate the sales team and keep them up to date with what the portfolio managers are doing.

“My primary objective is to represent the research team in the sales process. You need to have a grasp of the specifics of the portfolio,” says Parsonson.

He says his role is particularly important during the due diligence process.

Bentley and Parsonson say investors also want to meet the portfolio managers during the due diligence process. As a FoHF Liongate also likes to deal with the investment managers as well as investor relations teams in its underlying funds.

“Our idea is to always have a direct relationship with the portfolio manager. What we try to do very much is to recreate the process with our investors that we have with our individual managers,” says Parsonson.

Carnathan says she has been “extremely involved” in the due diligence process, pointing out if an investor comes back with a lot of supplementary questions to a due diligence questionnaire, the portfolio managers are unlikely to have the time to handle all of them.

The bonus seems to be that investors are more likely to stay in a fund once they have invested. Investor relations managers note that while due diligence now usually takes at least six months, the final result is more likely to be a long-term investment. It is therefore worth a management company’s time and energy to put in the effort to build a relationship through the initial process.

Hedge fund companies believe those handling the investment process on the client side are also more sophisticated in the post-crisis world.

“I think people have a much better idea of what they have got into and therefore understand why a fund might underperform or lag an index,” says Barrie. “People tend to understand the shape of returns much better.”

However, it is still important to give investors context and background for the masses of information provided. “It’s starting to think of investor relations as a competitive advantage,” says Liongate’s Parsonson.

Bentley adds: “People want a lot more for the price that they’re paying.”

An added value for investors in Armored Wolf is having Carnathan based in London rather than with the rest of the company in California. She explains the decision to sit in the UK was partly to manage timezone issues and partly to have a presence on the ground closer to investors.

“I think they feel like it’s not so far away. I find I’m on the phone late at night regularly to my guys in California. Investors aren’t going to do that,” Carnathan says. She points out US managers based in New York are slightly better positioned to handle client relationships from one office.

The larger the company, the more likely it is to have sales teams dotted around the world to handle investor relations. That is another barrier for smaller hedge funds fighting for capital in the current tough fundraising environment.

Despite the increased demands for technology and reporting systems, investor relations managers believe personal contact is vital. Although contact is more informed and focused on risk management, investment strategy and operations, people remain at the core of the investor relations effort.

“Ultimately people still buy from people and that dialogue and trust is very important. That’s hard to replicate online. It’s still very much a trust-based business and long may it continue that way,” concludes Barrie.