Hedge fund investor relations – the view of the allocators

November 2016 | SPOTLIGHT | FINANCE & INVESTMENT

Financier Worldwide Magazine

In the first half of 2016, we carried out a survey of hedge fund managers and their investors globally. The objective was to measure overall levels of satisfaction with the investor relations process, and in particular to see how effectively fund managers were engaging with investors. Altogether, 109 investors and 126 fund managers took part in the research.

The investor relations (IR) function within hedge funds is sometimes ill-defined, frequently being taken on by personnel with other duties, and covering a multitude of roles. Only the COO function is more abused. A significant portion of the industry still seeks to struggle through with no dedicated IR staff or resources.

By contrast, investor expectations of hedge funds remain high, and frequently unfulfilled. Emphasis from investors is on what fund managers are telling them, not how frequently they report. Fund managers also remain largely unaware of the degree to which online newsflow is used for investor research, both positive and negative.

Yet the quality of informed communication and reporting that hedge funds will be required to provide by investors in the future is likely to only increase. There is an opportunity here for IR professionals in the hedge funds industry to embrace some of the automation, security and data analysis tools currently available to enhance the role they perform, while saving valuable time to focus on more mission critical areas of their role.

Investors are not completely satisfied with the levels of communication they receive from the hedge fund managers they invest with. No investors who participated in the survey were ‘very satisfied’, and it is the overall quality of information which they are most critical of – 12 percent of investors claimed to be ‘very dissatisfied’ with the information they are receiving. Given the number of investors who participated, this demonstrates that the hedge funds sector needs to provide not only more data, but better data.

The natural follow-on question is: Where can hedge fund managers improve? Allocators were asked to assess fund manager communications across a range of criteria. While managers seem to be meeting investor expectations in terms of reporting on holdings and allocation details, there are still some critical weak points.

Foremost among these is the lack of knowledge of peers. Given that an effective comparison against peers in the market might actually benefit managers’ ability to differentiate and promote their funds more effectively (rather than simply referring to industry benchmarks or stock market indices), this is surprising.

Presentations are not being updated frequently enough, with over half of investors regarding this as ‘low quality’. As hedge fund managers are forced to deal with more information, it is becoming more difficult and time consuming for them to keep their materials up to date using purely manual processes. This also points to a lack of use of existing, cost effective technology to introduce a higher level of automation within the production process for presentations and fact sheets.

Finally, some investors expressed frustration at the volume of unsolicited communications from managers they are not invested with, which often has the opposite effect to that intended. Investors were asked their opinion on the format in which they preferred to receive fund manager reporting – the majority stated either newsletters/factsheets or email as their most preferable format. Group conference calls rank a distant third. Interestingly, investors are less keen on video reports at this time.

Overall, investors still feel hedge fund managers are falling short of expectations in the investor communications stakes, particularly in the quality of the information they were receiving. Forty-one percent said they were unhappy with information received, and another 38 percent were ambiguous. The only area where some investors said they were satisfied was with the frequency of updates. One respondent said that hedge fund IR teams “need to make it easier for investors to assimilate information. We are bombarded by emails and calls, and anything to make it easier for us would be great.”

“We don’t appreciate large documents and presentations,” commented another.

Websites

Fund managers need to invest in their websites, however. Investors are not at all happy with the quality of fund managers’ web presence, leading one investor to comment: “A Google search and a website visit are the first two things done when hearing from a new manager. If there is no website, or it’s not informative, [the manager] needs to work much harder to keep my interest”.

The vast majority of investors said they were either ‘somewhat dissatisfied’ (42 percent) or ‘very dissatisfied’ (28 percent) by the quality of the websites of the fund managers they were invested with, or thinking of investing with. Most importantly, all investors (100 percent) who responded to this survey said they used hedge fund managers’ websites as a source of information.

Investors were also asked to judge hedge fund managers’ websites by both usefulness and content. None were able to proclaim themselves even ‘somewhat satisfied’. They were most critical on the overall usefulness of fund managers’ websites – a striking 66 percent of allocators said they were ‘very dissatisfied’ in this respect.

Investor research

Investors are regular users of news media for their fund manager research purposes: two-thirds of investors stated they consult the internet or news media for information on hedge fund managers ‘extremely often’ or ‘very often’. This highlights the importance for managers of being aware of and contributing to the newsflow, or at the very least, being conscious of what is being said about them and their employees online.

Following on from this, it was also interesting to note that 27 percent of investors said that they would be ‘extremely responsive’ to additional qualitative information on hedge fund managers, for example panel discussions, webinars or interviews with the media. A further 25 percent said they would be ‘somewhat responsive’. This further highlights an appetite from investors for more information on fund managers.

Given the lack of knowledge displayed by managers about their peers – either the funds of most similar strategy and style, or those most likely to be competing for similar investor mandates – we specifically asked investors to rate hedge fund managers on their awareness of their peers. This feedback supported earlier findings; no investors believed fund managers carry out or report peer analysis ‘extremely’ or ‘very well’, while only a quarter of investors considered that hedge funds understood their peers ‘somewhat well’.

IR teams appear to be missing an opportunity to capitalise on their fund’s competitive edge against other firms, and differentiate themselves from managers against which they may be routinely compared. A manager’s lack of knowledge of how they are assessed and compared by allocators, and against whom, will continue to be a major handicap.

Areas of improvement

According to the investors surveyed, managers can improve the amount and quality of information about their strategy and manager’s style. There remains a serious communications gap when it comes to conveying investment strategy information to investors. Every investor interviewed for this study identified this area as one where improvement is urgently needed. There is an obvious reluctance by hedge fund managers to circulate too much detail on their intellectual capital, particularly as it can be hard to control or limit how materials might be disseminated beyond the immediate prospect or client.

IR teams also need to focus on how exactly they are communicating their ideas and key selling points to the investor community, as clarity of communication is also an issue for over 60 percent of investors interviewed.

Many allocators still pronounce themselves as confused about what managers are trying to tell them, which undoubtedly introduces delays in their decision to invest, or terminates their interest. Given the competition for investor capital within the hedge fund industry, those managers who are best able to clearly articulate their strategy, style and differentiating properties in a meaningful way to investors will benefit most from their interaction with allocators.

Stuart Fieldhouse is a director at IRHalo. He can be contacted on +44 (0) 7793 882230 or by email: stuart.fieldhouse@irhalo.com.

Stuart Fieldhouse

IRHalo