The price of independents

Independent marketers, along with others offering support services to the hedge fund industry, are growing in number but they have generated mixed reactions from hedge fund managers and investors.

Michael Goldman, managing director of Momentum UK, a global fund of funds with assets of over $1bn, estimates that his office receives "between 40 and 50 calls a month", from independent marketers. He reckons his staff then meet at most 10 or 15 managers a month, based on the quality of the material that arrives after the initial phone calls.

Jean-Francois Buisseret, founder of Concerto Capital Management in London, which provides marketing services and also runs three funds of hedge funds, says: "We are not happy if we do not see two hedge fund managers a day."

Paul Feldman, director of Buttonwood Investments, which manages a long/short European equity fund running around $50m, agrees with Goldman about the volume of interest he received from independent marketers when he was a fund of funds manager. But Feldman describes marketers as "at best, an irritation and at worst, a total annoyance".

Looking back, he feels that there was often "no effort made to tailor their shopping lists to his needs". He was, however, happy to communicate with a few independent marketers whom he trusted and felt "were choosy about who they chuck your way".

Marketers also approach hedge fund managers as potential clients. Joanna Pardoe, a director of London-based Gordon House Asset Management, which runs the £22m Gordon House Optimal hedge fund, confirms that, "we do get approached by independent marketers". And David Harding, managing director of Winton Capital Management, agrees that when managers are launching new funds, "lots of them come and see you".

Anthony Hodges of Hodges Associates, which provides general consultancy services to the hedge fund industry, believes the ubiquity of independent marketers is due to the youth of the hedge fund industry, particularly in Europe.

Because of this, Hodges believes that "experience is at a premium". Hedge fund professionals who have more than 10 years' experience are a "rarity", he says.

Hodges, who has a wide experience in hedge fund management, having traded, managed money and done marketing in his p page 16

Page 15 pp career, is not convinced that hedge fund managers are necessarily good businessmen. "They may have a good track record with large institutions but they have no experience or expertise in additional services," he says.

Hodges feels this offers "lots of scope for someone like myself to supply services" to independent hedge fund managers. Marketers are also finding clients among larger, more established hedge fund managers because they offer access to a specific investor base that an inhouse marketing team might lack.

Micky St Aldwyn, of International Fund Marketing, confirms this, offering the example of an independent marketer who might provide access to investors from a certain geographical area or of a certain type, such as US endowments.

Indeed, Pardoe recently appointed a marketer to assist Gordon House partly because the marketer has a lot of good contacts, not just in Europe but in the US as well.

However, St Aldwyn cautions that it can be "messy" to have two teams of marketers working on one product and can lead to confusion for investors. Even so, St Aldwyn agrees that marketers are becoming more common in the hedge fund industry. In the 15 years he has been involved in marketing gaining experience with ED&F Man, marketing its fund of hedge fund products he says he has "more competitors in Europe now than I had when I started".

Alex Bentley, of Baldwin Partners in Boston, says the trend is the result of hedge fund managers typically running a "pretty lean organisation", with no room for extraneous personnel. Using an independent marketer is therefore "no different to having a lawyer, administrator or prime broker; services which you couldn't possibly do yourself." He believes that hedge fund managers should focus on where their skills lie: "The best thing the manager can do is run a great fund. There has always been a need for [independent marketers]."

Hedge fund managers are careful about how they structure relationships with marketers. Harding, of Winton Capital Management, advises hedge fund managers to be "fairly cautious about entering into irreversible deals with marketers".

On the plus side, he believes that they offer the possibility of raising assets without adding to fixed costs. Harding says: "You don't have to pay an inhouse marketing person £100,000 [salary] in cash."

Managers are also concerned about employing a permanent inhouse marketing person because every hedge fund manager aims to close to new money as soon as possible. Feldman of Buttonwood admits he would be wary of taking on an inhouse marketer who would be "redundant after the fund has closed". Harding goes further, saying that he is positively opposed to introducing a marketer into his company permanently. "We aspire to be a technocratic organisation whose strengths lie in running funds successfully," he says.

Fee structures for independent marketers vary but generally the company is "paying the person on a best efforts basis", as Feldman puts it. The fee is basically a percentage of the assets that the marketer raises for the fund.

Bentley charges 20% of both the performance and management fees that the hedge fund manager takes, but doesn't charge a retainer. "I get paid, based on results," he says, and is content with this fee structure. "If you can't deliver you shouldn't be there."

Hodges' fees are slightly different: he receives a retainer plus commission, or a retainer as a draw against money raised. The latter works as an advance against the potential money raised. If he doesn't raise any funds then he will have spent all the draw and won't get any more; but if he does attract funds then he will get 20% of the net monies coming in.

Andrew Muir, responsible for institutional marketing and strategic development at Concerto Capital, emphasises that, as a distributor, it continues to take an annual fee as long as the investors it has introduced remain in the fund. Muir says: "The wealth we generate is dependent on the continued performance of the fund." This has the added pPage 19

Page 16 pp advantage that the best funds for the marketer are those that produce consistent steady growth.

Harding warns hedge fund managers against what he calls "flag-planting". This means the marketer is paid on the basis of providing a list of investors' names who are interested in the fund. It is then left up to the fund manager to call the names and attempt to get more positive commitments. As he puts it, "You then call and none of them is interested, or maybe one is five years later." Harding feels this is the "direction in which independent marketers tend to lean".

However, many hedge fund managers are keen to enlist the help of those independent marketers who they feel are dedicated and creative about raising money. Harding again: "We look for marketers who are prepared to put in sustained time and effort and to support client relationships." Pardoe was convinced by the marketer she has hired because he produced an idea for a product that was "quite different" to what staffers could have come up with "and that appealed to us".

Another benefit of bringing in a marketer, according to Feldman, is that they "know how to close a deal" something "most hedge fund managers don't have a clue about", and they tend to be quite determined with a "bulldog instinct".

Some marketers feel closer to the hedge fund managers they market on behalf of, while others identify more with the investors they market to.

Bentley says he is closer to his investors: "Funds tend to come and go but investors are always there." He has about 1,200 investors to whom he markets, and they range from high net worth individuals and family offices to fund of funds, pensions and endowments. He seeks hedge fund managers "across almost any market, strategy and sector". In particular, he wants managers who are "uncorrelated to the market and smart about risk controls". Bentley looks for managers who are "not just riding the market" but exploiting the market and creating positive returns.

Underlying his technique for marketing funds is the belief that "there is a life-cycle to raising capital for hedge funds." With a small or start-up hedge fund, he would target individuals and family offices. Then, as the fund grew, he would target funds of funds, pensions and endowments. He characterises his investors as "highly sophisticated" who know what they are looking for and who see him as an "information source". Bentley says he just "sets up the initial contact" between the investor and the fund manager: "There is no marketer out there who can sell a fund."

Muir agrees with Bentley. "Our role is that of an intermediary," he says, noting that investors will seldom make a commitment without meeting the manager.

By contrast with Muir and Bentley, Hodges says that "because I come from the supply side of the industry I feel closer to the hedge fund industry than the investor community." Investors are more like "clients" to him, although they are people he has been "dealing with for many years". He sees his investor base changing as hedge funds expand into the retail sector, which "opens up a whole new target market" among independent financial advisers.

Hodges employs a selection process when considering whether to take on a particular fund manager. If the fund has received seed capital it implies that someone else has already performed due diligence on it and has made a positive investment decision about the fund. He would take into account the fund manager's past track record, even in traditional investment. He says he is concerned to bring something new and different to his clients and to this end attempts to develop a "portfolio of managers who complement each other."

St Aldwyn also feels closer to the hedge fund managers than the investors because the managers "are the people you are representing", and from whom he receives payment. St Aldwyn also employs selection criteria when considering a hedge fund to market: "Consistency is the main quality that I look for."

With a smaller company he would look for two things: "The ability of the manager to make money [and] the ability of the manager to run a business". This might be based on the manager's previous experience. St Aldwyn's investor base is family offices, funds of funds and private banks. He does not target any individual investors.

Buisseret, of Concerto, says: "When we take on a manager we do so for the long term. We want every single manager to be of the very best quality. In the case of most managers we take a very active role and help the manager to set up a proper marketing strategy."

This can take in everything from designing a logo and targeting clients to setting up meetings and roadshows. Concerto also places importance on the hedge fund already having received seed capital as an indication that it is a credible fund.

"We are not in the business of giving money to people with no experience of managing money," says Buisseret. "We are very careful about long-only managers moving into hedge funds."

He adds: "We fill the gap between established investors for whom it is difficult to make a decision on managers."