Managers of fundamentally oriented hedge funds can learn a lot from the U.S. listed exchange traded fund (ETF) industry: not about investing, but rather marketing.
The first lesson: have a clearly defined and easily understandable strategy that sets you apart from your peers. For example, ETFs that focus on smart beta factors, like minimum volatility, have successfully raised billions of dollars in AUM in part because of their clear investment goal. Second, consider that long term fundraising success means having an investment story that resonates for years to come. The example from ETFs is that the largest dividend-oriented products, now certainly enjoying their moment in the sun, were all launched before 2010. Last but not least, stay true to your investment process and let the results speak for themselves. Drawdowns (ETFs have plenty of those too) tend to create less concern among investors if your investment approach is consistent and transparent.
The central reasons for this shift include structurally high asset price correlations, increasingly efficient capital markets, and the dominance of central bank policy over global capital allocation. Those factors, along with a low return/low volatility investment climate, currently favor low cost, index-hugging investment strategies over active management.
This too shall pass; market history repeatedly shows that once a trend becomes obvious it is most likely nearing its end. For active managers, the trick now is to keep going until the active/passive investment pendulum starts to swing the other way. John Maynard Keynes famously warned markets can stay irrational longer than you can stay solvent. For those managers with a story to tell and a track record to match, now is the time to focus on solvency. And, more importantly, to plan for success.
In that spirit, we believe that active managers can actually learn from the marketing successes of passive strategies generally and the growth of the U.S. listed exchange traded fund industry specifically. The latter is especially instructive, and not just because of its impressive fundraising track record, with over $2 trillion of assets under management, but rather for its constant stream of new products across the investment landscape. There are now more U.S. listed ETFs (over 1,900 at last count) than there are liquid listed domestic equities, and even more are on the way. It is a vibrant ecosystem, and one with secrets to share.
So what can we learn from ETFs that might be of service to active managers as they consider how to market their services? Three thoughts here:
1 – Keep your message simple, clear and direct.
For better or worse, this is something ETFs do remarkably well. It starts with the name of the product, such as min vol or enhanced dividend. As you read the marketing literature and regulatory documents, the actual investment process typically mirrors the implicit promise of the funds name: Own the 100 least volatile stocks in the S&P 500 or hold equities with the highest dividend yield in select emerging markets. One can question the potential success of the strategy, but the investment goal and the process at work seem to fit hand-in-glove.
2 – Your investment process should be demonstrably relevant in 2020 and beyond.
The old quote about skating to where the puck is going holds true in fund marketing as well as investing. Take dividend-focused ETFs, a hot investment product at the moment. The top 5 funds in terms of assets under management, which have collectively raised $5 billion in the last year, were all launched prior to 2010. They have benefited generally from declining interest rates since then, to be sure. But over the last 12 months, these products have really hit their asset gathering stride. Hedge fund strategies, regardless of which asset class they focus on, need similar levels of structural relevance in order to grow to their potential. Remember that the active/passive pendulum hasnt yet started its return trip. You want to be able to explain how your strategy will work in the middle-distance future as well as the present.
3 – Drawdowns matter less if you hold true to your strategy
Back to our example of minimum volatility strategies for a moment. Min vol doesnt mean no vol. These funds have had their share of pain over the last 5 years. Sometimes the min part doesnt even work out, but mostly it has. The point is that the asset growth success these funds have enjoyed in the last year was built on a consistent approach that goes back far longer than just 12 months.
The most important takeaway here is that the investment process and marketing both benefit from a consistent approach, transparently explained and (ideally) kept to a simple theme. Min vol is all of two words and six letters, but it gets the message across. It has had its ups and downs over the past year – what investment style hasnt? In the end, however, you improve your chances for sustained investment and asset gathering success by finding a differentiated approach, describing it clearly, and sticking to it. It works for ETFs; it will work for hedge funds as well.
