Loud and Clear – February 2019

A Fund’s Right to Exist – Part II: The Manager’s Paradox

 

Understanding the building blocks to articulating a fund’s investment highlights is a key discipline for fund managers that want to raise money, successfully. The good news is that you can read all about that in a previous note (“POISE: Four Easy Steps to Pitching Your Fund”); the bad news is that this is not the whole story. Describing the highlights of your fund is not enough: you need to establish the right of your fund to exist.

That’s why we have written a series of articles on this topic, which began with The Goldilocks Principle and continues, now, with The Manager’s Paradox.

The Manager’s Paradox relates to the challenge of demonstrating the repeatability of your investment and value creation strategy whilst, at the same time, convincing investors that this same strategy is all but impossible to replicate.

Sounds like a tough ask, doesn’t it?

Let’s break it down into its main constituents:

    1. Showing that your methods are repeatable
    2. Convincing that your methodology is exclusive

Showing that your methods are Repeatable

The key here is to ensure that the way you describe your strategy and the operational aspects of your work is clear, simple and not unduly weighed down with technical details. The aim is to leave a prospective investor with the feeling that there is no reason why the strategy, as laid out in your documents, wouldn’t work and that the performance of the processes required to execute the strategy can be expected to take place without any issues.

Managers often harbour the misconception that mystifying the strategy or operations of the fund is the holy grail. Nothing could be further from the truth. There may be elements of your work that are unique, or close to unique (more on that, next), but these must be overlaid on a background of clear purpose and activity. There should be no concern that you might lose an investor’s money – you are not raising a black box hedge fund, after all…

Convincing that your methodology is Exclusive

The only problem with presenting your strategy and its execution as straightforward, is that it risks giving the impression that the work you do is somehow unexceptional and that there exist no barriers to prevent any other fund manager from simply aping what you do and providing the same return – perhaps at a lower management fee, even.

Well, this is the clever bit.

Whilst the actual activities that you undertake in the portfolio and the way you source investments must feel “easy”, you must always support this with a notion of “privilege” – some unfair advantage you have over any others in the market that make the activities that are so impossibly simple for you, simply impossible for anyone else.

Perhaps you have family ties to a particular industry? Or maybe a previous career developing relationships for quite some other reason that now have become extremely relevant again.

Whatever these advantages are, display them to full effect to show how exclusive your fund actually is – and how difficult to replicate your returns will be.

In our final piece of this short series, we will turn our attention to the “Pragmatist’s Manifesto”, which looks at striking the balance between a noble, “righteous” purpose for your work and the clear statement that you are 100% focused on what it really means to be “effective”: generating strong, consistent, long-lasting returns for your investors.


If you would like help developing your brand or positioning your firm, please contact Matthew Craig-Greene using the contact details below.