By Blaine Hurty, Managing Director, Head of Capital Introduction, Clear Street
In this challenging year for the hedge fund industry, the durability of small- to mid-sized funds comes into focus. While many larger funds can withstand ongoing market uncertainty, emerging managers face a unique set of limitations.
Considerable amounts of new money continue to flow to fund managers at decent levels, but beneficiaries of those funds are increasingly narrow, whereby the top 5% of the world’s hedge fund managers are expected to take 80-90% of investor inflows in 2023. The domination of this small group of funds has squeezed the total pool of hedge funds to its smallest size since 2009.
A survey of hedge fund managers found that more than 80% of emerging managers said capital raising was their biggest challenge. Almost half said that attracting investor inflows is tougher today than it was a year ago. This continued pattern calls for bespoke capital introduction solutions designed to help the other 95% of funds succeed.
The right prime brokerage parter will explore ways to support clients as an ongoing part of strategy – whether through operational support, enhanced reporting, or risk management tools. Capital introduction teams should take a tailored approach to each client, regardless of size or where they are in their life cycle.
The state of capital introduction today
Capital introduction is a service provided by investment banks and prime brokers to hedge fund managers and other asset managers. At its core, capital introduction functions facilitate introductions between these managers and potential investors, such as institutions, family offices, and high-net-worth individuals. The goal is to help managers meet investors.
Initially, capital introduction at banks started as small, informal, but impactful networking events, where the bank would introduce a manager to their network of institutional investors. These events allowed fund managers to showcase their strategies and performance to potential investors. Over time, capital introduction evolved into a more significant and structured part of a prime broker’s business and prime sales process. It now includes various forms of investor introductions, conferences, forums, and an extensive network of events focused on different asset classes, geographies, and fund strategies.
No question raising assets is challenging, and capital introduction is difficult. The state of capital introduction today is shaped by large industry conferences and big emerging manager events. The dominance of these events has deteriorated the quality of what was once a high-quality service provided to clients.
Today, independent third-party groups play a major role in the hedge fund industry. Large marketing firms and banks put on huge industry conferences that serve what is now the format for capital introduction. It’s hard to know how effective these events are for managers, and, in some cases, they may only serve the interest of the conference provider, not the managers or the investors.
Bespoke solutions for improved performance
There is no one-size-fits-all elegant, efficient solution for capital introduction. Larger financial institutions, third-party marketing groups, and dedicated conference providers have tried to increase efficiency by running large-scale events rather than focusing on tailored outreach. This leaves managers with the difficult task of trying to differentiate themselves at a huge conference, in a room full of managers having 1-on-1 speed dating type meetings, or navigating a web-based scheduler with hundreds or even thousands of other funds.
It’s much more effective to have fewer conversations with the right allocators to better understand their specific needs. Therefore, it is essential to have a seasoned team with deep-rooted investor relationships and the ability to build new ones. It is also crucial to spend face-to-face time with these investors.
Money managers do two things that matter most: 1) investment performance (on an absolute and relative basis) and 2) raise and retain capital. If managers are spending time reaching out to investors who aren’t interested, meeting with people who need to fill a quota of meetings for a conference, then they can’t tune in to what’s important – growing their business.
Capital introduction should be a partner, making introductions on behalf of allocators and connecting clients with like-minded investors they may have yet to be able to reach independently. For long-term success, capital introduction must peel away from pure efficiency and evolve it into a true value-added service for clients.
