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About Lisa Vioni
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Lisa Vioni, an 18-year veteran of the capital markets, is the founder and President of Hedge Connection Inc. She began her career in MBS sales in 1990 at Prudential Securities and later became Senior Vice President in MBS Institutional Sales at Lehman Brothers Securities where she covered money managers, banks and hedge funds. Ms Vioni left the sell side in 1998 to market hedge funds. She joined Singleterry & Company (S&C), a small start up MBS hedge fund and later joined Ellington Management Group (EMG), a billion plus MBS hedge fund as Director of Marketing. At S&C and EMG Ms. Vioni oversaw all aspects of client relationships including raising money, organizing small company conferences, developing marketing materials and client servicing. In June of 2003, Ms Vioni launched Investment Management Resources (IMR), a company that hosts boutique conferences putting hedge funds and investors together in investor-intro events. In October 2004, the idea to create a web based investor-intro website was born. Ms. Vioni launched Hedge Connection in October 2005. In the fall of 2007, Ms. Vioni began building a web based social networking site for people attending conferences. This site was launched into beta testing mode in September 2008. IMR currently hosts 6-8 investor-intro events each year. Hedge Connection has over 1500 members as of December 2008 and has been responsible for helping several funds raise significant assets. Lisa also has produced three Broadway shows including Long Days Journey Into Night in 2003 for which she won a Tony Award. |
Marketing Tips
A few key themes emerged from the recent Hedge Fund Marketing and Client Service Event. One of which was that this is not the time to try to close the sale – rather this is the time to educate, build relationships, confidence and trust. The implications are important from the perspective of expectations management, preparation of communications materials and budget allocation. Read More
Allocating Precious Marketing Dollars
The outflow of assets is leading some hedge funds to re-evaluate their marketing efforts. However, more often than not, many funds don’t really do a thorough cost benefit analysis before spending marketing dollars. As traditional providers of capital introduction leave the space, opportunities for poor decision-making is rampant. There is the perception that marketing a hedge fund is some sort of black art, however, in truth marketing is fairly straightforward. It requires time, energy and a targeted budget. Read More
Taking Stock and preparing a plan for 2009
Conversations with investors confirm our suspicion that there is cash on the sidelines and that the current focus is on reviewing due diligence procedures and identifying opportunities. Since information is more important than ever, investors continue to meet and talk to hedge funds as they discern where the best sectors to allocate lie. Read More
Pension funds roughly account for 40% of Institutional money. It was reported in a New York Times article dated 11/27/05 that pension funds are going to be getting much more aggressively invested in hedge funds. Faced with a growing number of retirees they are pouring BILLIONS into hedge funds. By 2008 it is estimated that pension funds will have $300 billion in hedge funds versus $5 billion a decade ago. Some of the larger players are Weyerhaeuser, General Motors, International Paper and Verizon. While pension fund money is typically more difficult to access because of the long due diligence process, it is worth the time to begin developing these relationships. You may be too small for a pension fund today, but a year from now that hopefully will not be true. Hide Tip
Before going to a conference, read the agenda and make a list of the speakers. See which speakers you might be interested in meeting while at the conference. Often conferences will feature investors on a speaking panel. Make sure that you contact these investors before arriving at the conference and try to book 15 – 30 minutes to sit down and speak with them about your fund while at the conference. If you wait until you are at the venue you will be hard pressed to even get their attention. You will see that after the speakers finish their panel all of the hedge fund managers in the audience will swarm around them in the hopes of getting 30 seconds of their time. Be prepared before you go so that you don’t have to be one of these seemingly desperate hedge funds vying for some attention. If you cannot pin them down to a time to meet with you, at least you will be able to approach them and mention the phone conversation. Exchange cards and tell them that you will be following up with marketing materials the following week. Hide Tip
Use your My Investor log to organize yourself. The thing that separates a good marketing person from a great marketing person is their ability to be organized. This includes their ability to be consistent with the information they are sending out to prospective investors. It is important to remember to follow up with the investors you have met on Hedge Connection (or anywhere else) at least every month to every 3 months. You can do this via e-mail each month. But make sure that you follow up with a phone call at least every other month until you can get your manager a face to face meeting with the investor. This is a relationship business and doing this follow up will help you build your relationship and trust with the prospective investor. Hide Tip
Hedge Fund managers with a trading background often fall into the trap of thinking that the sales cycle of raising money for a hedge fund is the same as that of selling a bond or a new issue. However, they soon discover that the process is much longer and sometimes painfully slow. It is not enough to meet investors and "soft circle" them for an investment. Money is not raised during a short period of aggressive marketing. Rather it is a continuous process of building relationships and familiarity with the strategy and risk profile. The process depends greatly on building trust with the investors who will end up being long-term partners. These relationships are not built over night. Likewise, they hopefully will not fade quickly either.
Barton Biggs' recent book, "Hedge Hogging" offers a humorous and insightful account of the cap-intro roadshow. He describes the "fun and glamour" of being paraded around to a series of meetings hosted by Morgan Stanley Private Bankers.
As the majority of hedge funds do not have access to such white glove treatment, Hedge Connection is a tool for the rest of us. Hide Tip
Barton Biggs' recent book, "Hedge Hogging" offers a humorous and insightful account of the cap-intro roadshow. He describes the "fun and glamour" of being paraded around to a series of meetings hosted by Morgan Stanley Private Bankers.
As the majority of hedge funds do not have access to such white glove treatment, Hedge Connection is a tool for the rest of us. Hide Tip
Establish a brand: It is critical that a hedge fund establish a brand which requires a name, logo, marketing materials, website, newsletters,
presentation and liaison with the media.
Identify competitive environment: This is two-fold. You will need to understand the other funds that have the same strategy - who are the
principals, how are they different? How are they the same? You should be
able to express this to investors in a way that does not sound defensive or
critical of your competitor.
Develop a plan to identify and start building relationships with investors:
Whether it is from your proprietary database, TPMs or service providers such
as Hedge Connection, you must start to build meaningful relationships and
build trust. Only those investors who truly understand how you make money will invest with you.
Organize data: Follow-up is critical and organizing follow-up is a
data-management exercise. Whether you use a purpose built IRM/CRM solutions or Excel depends on how much time/money and energy you wish to spend on the process. The more organized and consistent you can be with follow up, the quicker you will build a relationship with an investor.
Activity: At the end of the day, a successful marketing program has to include activity - 1:1 meetings, conference calls, attending industry
conferences, cap-intro events etc. You will have to leave the office and as
time is valuable, you should consider the +/- of all options so that you get
the best ROI from your limited time.
A successful marketing effort requires sustained commitment and can not be turned on and off when convenient. It is a long process, but if you build a
sound company and have consistent returns, you will begin to raise assets. Hide Tip
presentation and liaison with the media.
Identify competitive environment: This is two-fold. You will need to understand the other funds that have the same strategy - who are the
principals, how are they different? How are they the same? You should be
able to express this to investors in a way that does not sound defensive or
critical of your competitor.
Develop a plan to identify and start building relationships with investors:
Whether it is from your proprietary database, TPMs or service providers such
as Hedge Connection, you must start to build meaningful relationships and
build trust. Only those investors who truly understand how you make money will invest with you.
Organize data: Follow-up is critical and organizing follow-up is a
data-management exercise. Whether you use a purpose built IRM/CRM solutions or Excel depends on how much time/money and energy you wish to spend on the process. The more organized and consistent you can be with follow up, the quicker you will build a relationship with an investor.
Activity: At the end of the day, a successful marketing program has to include activity - 1:1 meetings, conference calls, attending industry
conferences, cap-intro events etc. You will have to leave the office and as
time is valuable, you should consider the +/- of all options so that you get
the best ROI from your limited time.
A successful marketing effort requires sustained commitment and can not be turned on and off when convenient. It is a long process, but if you build a
sound company and have consistent returns, you will begin to raise assets. Hide Tip
A quick Google Search of "Amaranth Hedge Fund" returns ~500,000 hits - including the sale of a $99 Amaranth branded water bottle. We are not interested in rehashing the sequence of events that led to Amaranth's spectacular collapse. However, we can learn from this fiasco. Investors are now, possibly more then ever, acutely focused on the risk controls that funds have in place. The event serves as a useful reminder for all Hedge Connection members to review how you are discussing risk controls in your marketing materials. Take another look at your presentation with these questions in mind.
What are the structural systems in place to manage risk?
Who is assigned to manage risk?
How are they compensated?
How do internal checks and balances work?
Are there set limits? How are these enforced?
Is it all written down?
Who is responsible for Trading? Leverage? Valuation?
How do you value your portfolio?
If operations take place in different locations how does oversight work?
How often do you meet to discuss portfolio positions and risk measures?
Are there fixed meetings in the schedule?
Where do the risk slides sit in the presentation? Hide Tip
What are the structural systems in place to manage risk?
Who is assigned to manage risk?
How are they compensated?
How do internal checks and balances work?
Are there set limits? How are these enforced?
Is it all written down?
Who is responsible for Trading? Leverage? Valuation?
How do you value your portfolio?
If operations take place in different locations how does oversight work?
How often do you meet to discuss portfolio positions and risk measures?
Are there fixed meetings in the schedule?
Where do the risk slides sit in the presentation? Hide Tip
Create custom investor searches that you can use over and over again. Save investors to your radar screen so that you do not have to find a potential lead later. This will make your search process efficient and quick. You can cut down on time by using the radar screen and saving search parameters. Remember to upload all the marketing material you want to make available to investors. You have 50 mega bites of space. . .use it!! Hide Tip
If an investor says they are not looking at your strategy now, don’t completely write them off as a potential investor. Set an alarm in your database to alert you to check in with that investor in 2 to 3 months. Ask the investor if you can add them to your distribution list. It is important to get on the investor’s radar so that when they are ready to consider an investment in your strategy, they already know you. Hide Tip
Before you decide to go to a conference, make sure you know your annual marketing budget. Plan your annual calendar ahead of time rather than making last minute snap decisions. Check out Hedge Connection's "upcoming events" area and other free hedge fund conference websites that exist to get a good idea of what conferences are happening throughout the year and where. Hedge Connection negotiates discounts for our users. So make sure you inquire about discounts and promotional codes before you buy a pass. Make a plan for when and where you want to go to market your fund over the course of the year and then pick the conferences accordingly. I would often combine going to a conference with scheduling investor meetings in the area. For example, do one conference in NY, one in San Francisco, one in Europe and the fourth in Bermuda or Asia. Use Hedge Connection to find potential investors in the area that you will be visiting. Try to set up meetings with the investor while you are going to be in the area. Hide Tip
As I have said in previous tips, the sales cycle to raise money is long and demands much more than simply a few e-mails. It literally will take months to build a relationship that may result in an investment. Recently a major prime broker shared the results of an internal survey which revealed some informative statistics on the success of hedge fund money raising efforts. I thought the results would be helpful in managing your own marketing expectations.
Hit rates: This prime broker found that relationships with family offices result in the highest chance of success by hedge funds to raise money with a 6% hit rate. That's correct, 6%. On average 6% of all relationships lead to an allocation. The statistics are harsher for FOFs at 4%. What this essentially means is that the majority of the meetings, conference calls, cocktail parties, networking events and conferences that a hedge fund participates in will not result in an allocation. This again illustrates how capital raising is as much a numbers game as anything else. If a fund has good performance, good infrastructure, pedigree etc., then the more investors that they meet and build relationships with will result in a higher probability of raising capital.
Expectations: This same prime broker shared that in 2004, managers indicated that they raised 25% more then they expected. In 2005, this dropped to raising 25% less and in 2006 it fell further to 33% less then the initial target.
The fact is that capital is harder to find and manager's expectations are often too high. Hedge Connection does not provide a shortcut through this harsh reality, but it will save managers time, effort and often money. By providing direct access to qualified investors that have been vetted as to who they are and what they are investing in, Hedge Connection helps managers quickly build their network of investor relationships and increase the likelihood of capital raising success. Hide Tip
Hit rates: This prime broker found that relationships with family offices result in the highest chance of success by hedge funds to raise money with a 6% hit rate. That's correct, 6%. On average 6% of all relationships lead to an allocation. The statistics are harsher for FOFs at 4%. What this essentially means is that the majority of the meetings, conference calls, cocktail parties, networking events and conferences that a hedge fund participates in will not result in an allocation. This again illustrates how capital raising is as much a numbers game as anything else. If a fund has good performance, good infrastructure, pedigree etc., then the more investors that they meet and build relationships with will result in a higher probability of raising capital.
Expectations: This same prime broker shared that in 2004, managers indicated that they raised 25% more then they expected. In 2005, this dropped to raising 25% less and in 2006 it fell further to 33% less then the initial target.
The fact is that capital is harder to find and manager's expectations are often too high. Hedge Connection does not provide a shortcut through this harsh reality, but it will save managers time, effort and often money. By providing direct access to qualified investors that have been vetted as to who they are and what they are investing in, Hedge Connection helps managers quickly build their network of investor relationships and increase the likelihood of capital raising success. Hide Tip
You have to develop a well thought out marketing program and stick to it. We kick off the New Year with some useful tips of how to outline a marketing agenda for the coming year.
Identify Marketing Goals for 2007:
All successful programs include a definition of goals that serves to focus your marketing effort. A few questions to ask when defining goals:
Get in front of Investors - How to allocate your time
Reserve time each week for marketing activities rather than trying to integrate your marketing effort haphazardly. Consistency and organization is key to success. Every fund allocates time differently. Some funds organize time around milestones or events throughout the year; such as conferences, industry events, and investor meetings. Others think in terms of hours a week. One member firm makes marketing calls on Tuesday/Thursday mornings - every week.
Some tips to organizing your investor relationship building goals for the year:
Be realistic with yourself and your goals. If you have underperformed, have a good explanation about how you will improve going forward. Keep your commentary positive, but honest. Remember that you are building a relationship that will take many months before resulting in an investment. Hide Tip
Identify Marketing Goals for 2007:
All successful programs include a definition of goals that serves to focus your marketing effort. A few questions to ask when defining goals:
- Am I ready to market my fund or should I focus on building my track record and infrastructure first?
- What is my marketing budget for the year? How will I spend this money most effectively? E.g. join HedgeConnection.com, go to more conferences, make dedicated marketing trips, hire a marketing person etc.
- Are my marketing materials current or do I need to update them?
- If I do not have a dedicated marketing person, do I need one? How do I want to delegate that duty…internally, third party, a combination of both.
- Where do I want to be at the end of the year in terms of new investor contacts and AUM?
- What is a realistic AUM goal and how many investor relationships do I need to develop to reach that goal?
- Do I need new investors or should I focus on current investors to grow my AUM?
- Can I grow my existing investor base organically or do I need to go outside of my "friends of the firm" circle?
- Do I need different types of investors to diversify my funds' investor base? E.g. more family offices, FOFs, international, etc.
- What current investors can I ask for a referral to new investors?
Get in front of Investors - How to allocate your time
Reserve time each week for marketing activities rather than trying to integrate your marketing effort haphazardly. Consistency and organization is key to success. Every fund allocates time differently. Some funds organize time around milestones or events throughout the year; such as conferences, industry events, and investor meetings. Others think in terms of hours a week. One member firm makes marketing calls on Tuesday/Thursday mornings - every week.
Some tips to organizing your investor relationship building goals for the year:
- Identify 50-75 investors that you would like to target this year. If you are performing well and reporting consistently, you should be happy if by the end of the year you have built relationships with 10% of these investors.
- Make sure that you have made contact with each and that you are distributing your monthly performance to each.
- Follow up in February-March with your first round of calls to arrange as many face to face meetings as you can.
- Follow up in April to get face-to-face meetings with those who you have not yet met.
- If you are going to a conference, check to see if any of your targeted investors will be at that conference. Use the conference as an opportunity to meet the investor in person. Set your meeting up well in advance to insure getting on their schedule.
- By June-July, make sure that you have met each investor that you wanted to meet in person. Those who will not meet with you should move to your B list. Do not ever remove an investor from your list completely unless you do not want that investor in your fund.
- Follow up in July/August with each investor you have met. When you call, make sure that you have something to tell the investor. Do not just call to say hello. Call to tell them something that is significant about you, your performance, your fund, why they should invest with you etc. Ask them when they will be making allocations next. Make sure they know that you are still taking new investors.
- In September try to pin down investors for a second meeting.
- In October and November, begin to ask for verbal commitments for investments into your fund. Recognize that it is the end of the year and that most investors will be either allocating or reorganizing their portfolios. It is a natural time for the investor to now consider your fund as a potential investment.
Be realistic with yourself and your goals. If you have underperformed, have a good explanation about how you will improve going forward. Keep your commentary positive, but honest. Remember that you are building a relationship that will take many months before resulting in an investment. Hide Tip
Hedge fund managers should focus on building relationships with investors and outlining clearly their edge and investment opportunity. Funds can start the year by following these business development tasks.
1. Contact current investors: In addition to monthly letters and quarterly updates, this month provides a good opportunity to pick up the phone and talk to all of your investors. The objective of the call is to outline the opportunity as you see it in your sector and to discuss with investors how they are positioned for 2009. Ask if there is any other information that you can offer to help them accomplish their due diligence and investment goals for 2009.
2. Clean up the database: When you send out monthly performance, how many email bounce-backs do you have? Raising capital is a numbers game. If investors are not receiving your information then the numbers are not working for you. If your contact has moved, begin building a relationship with a new contact at the firm.
3. Status check with service providers: Review what service providers you are using. Asses whether or not they are good enough to meet the higher standards that will be demanded of investors post Madoff. Schedule a conference call to ensure that all of your service providers are meeting your expectations.
4. Prioritize call list for 2009: Create a prioritized call list of investor prospects and methodically work through it.
5. Manage your expectations: Be realistic about what you will be able to accomplish this year in terms of building your AUM. Make sure that you are financially set to have a slow and difficult year in terms of raising money.
We look forward to 2009, the year in which hedge funds get back to basics. Hide Tip
1. Contact current investors: In addition to monthly letters and quarterly updates, this month provides a good opportunity to pick up the phone and talk to all of your investors. The objective of the call is to outline the opportunity as you see it in your sector and to discuss with investors how they are positioned for 2009. Ask if there is any other information that you can offer to help them accomplish their due diligence and investment goals for 2009.
2. Clean up the database: When you send out monthly performance, how many email bounce-backs do you have? Raising capital is a numbers game. If investors are not receiving your information then the numbers are not working for you. If your contact has moved, begin building a relationship with a new contact at the firm.
3. Status check with service providers: Review what service providers you are using. Asses whether or not they are good enough to meet the higher standards that will be demanded of investors post Madoff. Schedule a conference call to ensure that all of your service providers are meeting your expectations.
4. Prioritize call list for 2009: Create a prioritized call list of investor prospects and methodically work through it.
5. Manage your expectations: Be realistic about what you will be able to accomplish this year in terms of building your AUM. Make sure that you are financially set to have a slow and difficult year in terms of raising money.
We look forward to 2009, the year in which hedge funds get back to basics. Hide Tip
I recently had a conversation with a hedge fund member who told me that he flew to NYC at the request of his third party marketer to meet an investor. About 5 minutes into the meeting it was clear that this investor would not be interested at this time in investing in this manager's type of hedge fund. This trip was a waste of time and money for this manager and it left a bad taste in his mouth for his third party marketer.
Under no circumstances should a manager or marketer leave the office to meet an investor before having a conference call with the investor. Despite the assurances of your third party marketer, prime brokerage cap-intro team or best friend, you should always have an introductory call with an investor before scheduling a face-to-face meeting. During a conference call you will be able to assess if the investor is worthy of your time. This is doubly true if you are contemplating getting on a plane to meet with a new investor.
A pre-meeting call is widely understood and acceptable to serious investors. Remember, time is your most valuable commodity and can't be replaced. Hide Tip
Under no circumstances should a manager or marketer leave the office to meet an investor before having a conference call with the investor. Despite the assurances of your third party marketer, prime brokerage cap-intro team or best friend, you should always have an introductory call with an investor before scheduling a face-to-face meeting. During a conference call you will be able to assess if the investor is worthy of your time. This is doubly true if you are contemplating getting on a plane to meet with a new investor.
A pre-meeting call is widely understood and acceptable to serious investors. Remember, time is your most valuable commodity and can't be replaced. Hide Tip
This tip highlights a couple of effective "follow-up triggers" or natural opportunities to pick up the phone and get back in front of the investor.
- Infrastructure upgrades: The addition of new research talent, marketing expertise and senior management in the middle/back office operations is news and serves as an excellent opportunity to contact your investor leads. The purpose of the call is twofold; to have them update their understanding of the headcount/infrastructure and more importantly share your optimistic prospects that warrant the additional resources.
- Strategy Opportunity: There are times that the market offers an opportunity, and if pursuing that opportunity remains consistent with your PPM and prior disclosures, you are wise to pick up the phone and contact your top leads. Ideally, these are situations where an expertise in a specific sector or instrument offers insight into another opportunity.
- Significant Investment Milestones Met: Increases in AUM offer a great chance to place yourself in front of investors. The fact that you have gone from $10 to $20 million or from $25 to $50 million is noteworthy and indicates that others have confidence in your money management abilities. Know before the call whether or not you can use the investor's name as a reference. Your best source of new investors is from your existing investors. Make sure that you have names and numbers ready to give to prospects if you have permission. Ask the existing investor questions: "May I use you as a reference investor?" and "May I mention that (investor company) is invested in the fund?"
- Media Mentions: Investors often speak at conferences and to the media. When they make a decision to do this, their objective is to have their message heard and understood. Too often they are quoted but the significance of their comments go unnoticed. Publications such as HFManager and Finalternatives offer excellent insights into investors' priorities and investment approach to alternatives. If you read that one of your prospects has been quoted in the newspaper, pick up the phone or email him and if possible draw connections between his/her comments and your fund. These emails/phone calls serve to remind your leads that you are aware and fully engaged in the marketing process.
We recently attended a Managed Accounts Summit held in New York. The event offered profound insight into the growing trend of hedge fund investing through managed accounts. The clear takeaway from the event was that managed account investing will rapidly gain in popularity and become the norm going forward especially for institutions who are looking for full transparency.
What is commonly heard from managers is that the administrative cost, disclosure of trading strategies and increased liquidity make managed accounts unattractive to the manager. However, the benefits of managed accounts for investors are compelling - especially in light of well-documented blow-ups that could have been avoided with the transparency that a managed account provides. Before dismissing a managed account as an administrative hassle and threat to your trading strategy, it is useful to consider the benefits of the managed account structure from the investor's perspective.
Key benefits:
Transparency - Daily or weekly transparency into position-level data allows the investor to have confidence in risk exposure across the portfolio and manage against style drift.
Liquidity - managed accounts do away with many of the "investor unfriendly" features of the pooled vehicle including lock-ups, redemption periods, gates, audit holdbacks and side-pockets.
Operational due diligence - While not a replacement for individual due diligence, investors are comforted by the layer of oversight conducted by the Managed Account platform.
Dynamic risk management - By assessing positions across 15-20 underlying hedge fund investments, an investor can speak with confidence on their portfolio exposure to any given asset, duration or sector.
Pricing - the investor receives independent pricing of the portfolio as assets are held in their account at the prime broker of their choice.
Cash control - Investor controls cash and can instruct prime broker to trade out of positions in worst case scenarios where manager drifts from IMA.
Insulate account from fraud - In the event that assets of pooled vehicle are frozen managed account investor has freedom to trade out of positions
Stress test - investor is able to run stress tests against the portfolio in aggregate
Structured Products - All structured products are written using managed accounts. Investors seeking additional leverage or principal protected notes written against a hedge fund require a managed account structure.
The benefits to the investor do not necessarily come at the expense of the manager. By joining a managed account platform e.g. MSS, Lyxor, MAN, CASAM - a manager may gain access to investors outside their marketing effort e.g. South African private bank or a Malaysian family office.
According to Jack Schwager, the Investment Director of Fortune Group, the transition to managed accounts will accelerate from being rare to commonplace. He lays out the following domino theory that will increase exposure to managed accounts at the expense of the traditional FOF structure:
1. Investable indices provide representative exposure to hedge funds and hedge fund strategies
2. FOFs transition to managed account platforms to dynamically manage their risk exposure
3. More FOFs make transition as "Technical risk manager" replaces "old fashioned stock picker of managers"
4. Institutions migrate from pooled FOFs and HF investments to Managed Account structures
5. Managers see assets migrate to managed accounts
6. More managers accept managed accounts increasing the opportunity set. Hide Tip
What is commonly heard from managers is that the administrative cost, disclosure of trading strategies and increased liquidity make managed accounts unattractive to the manager. However, the benefits of managed accounts for investors are compelling - especially in light of well-documented blow-ups that could have been avoided with the transparency that a managed account provides. Before dismissing a managed account as an administrative hassle and threat to your trading strategy, it is useful to consider the benefits of the managed account structure from the investor's perspective.
Key benefits:
Transparency - Daily or weekly transparency into position-level data allows the investor to have confidence in risk exposure across the portfolio and manage against style drift.
Liquidity - managed accounts do away with many of the "investor unfriendly" features of the pooled vehicle including lock-ups, redemption periods, gates, audit holdbacks and side-pockets.
Operational due diligence - While not a replacement for individual due diligence, investors are comforted by the layer of oversight conducted by the Managed Account platform.
Dynamic risk management - By assessing positions across 15-20 underlying hedge fund investments, an investor can speak with confidence on their portfolio exposure to any given asset, duration or sector.
Pricing - the investor receives independent pricing of the portfolio as assets are held in their account at the prime broker of their choice.
Cash control - Investor controls cash and can instruct prime broker to trade out of positions in worst case scenarios where manager drifts from IMA.
Insulate account from fraud - In the event that assets of pooled vehicle are frozen managed account investor has freedom to trade out of positions
Stress test - investor is able to run stress tests against the portfolio in aggregate
Structured Products - All structured products are written using managed accounts. Investors seeking additional leverage or principal protected notes written against a hedge fund require a managed account structure.
The benefits to the investor do not necessarily come at the expense of the manager. By joining a managed account platform e.g. MSS, Lyxor, MAN, CASAM - a manager may gain access to investors outside their marketing effort e.g. South African private bank or a Malaysian family office.
According to Jack Schwager, the Investment Director of Fortune Group, the transition to managed accounts will accelerate from being rare to commonplace. He lays out the following domino theory that will increase exposure to managed accounts at the expense of the traditional FOF structure:
1. Investable indices provide representative exposure to hedge funds and hedge fund strategies
2. FOFs transition to managed account platforms to dynamically manage their risk exposure
3. More FOFs make transition as "Technical risk manager" replaces "old fashioned stock picker of managers"
4. Institutions migrate from pooled FOFs and HF investments to Managed Account structures
5. Managers see assets migrate to managed accounts
6. More managers accept managed accounts increasing the opportunity set. Hide Tip
Based on my own experience and the feedback that I have received from investors, I've outlined below what I consider a reasonable communications program. The key is to set up a program of consistent communication with your investors and investor prospects.
1. Monthly Tear Sheet - Issue monthly results in a succinct fact/tear sheet as soon as possible. Consistent communication is critical, so strive to issue the performance updates at the same time each month. The tear sheet should contain relevant metrics and a succinct qualitative wrap-up of the month. Note: HC Junior and Executive members now have access to an automated marketing tear sheet created through the HC technology.
2. Quarterly Conference Call - Host a quarterly conference call for all fund investors and prospective investors. Establishing a call at a specific date and time each quarter will condition investors and focus your internal team to discuss results on one date. In many cases, investors are required to check in with holdings at least once a quarter and hosting a group call will consolidate the individual calls and save time.
3. Ad-hoc Investor Calls - Some investors are high touch and require more communications. Proven methods to work around these investors is to provide additional transparency so that they can answer many questions themselves and encourage these investors to participate in the quarterly conference call. However, if important investors require more frequent communication, be prepared to be flexible. Hide Tip
1. Monthly Tear Sheet - Issue monthly results in a succinct fact/tear sheet as soon as possible. Consistent communication is critical, so strive to issue the performance updates at the same time each month. The tear sheet should contain relevant metrics and a succinct qualitative wrap-up of the month. Note: HC Junior and Executive members now have access to an automated marketing tear sheet created through the HC technology.
2. Quarterly Conference Call - Host a quarterly conference call for all fund investors and prospective investors. Establishing a call at a specific date and time each quarter will condition investors and focus your internal team to discuss results on one date. In many cases, investors are required to check in with holdings at least once a quarter and hosting a group call will consolidate the individual calls and save time.
3. Ad-hoc Investor Calls - Some investors are high touch and require more communications. Proven methods to work around these investors is to provide additional transparency so that they can answer many questions themselves and encourage these investors to participate in the quarterly conference call. However, if important investors require more frequent communication, be prepared to be flexible. Hide Tip
1. Branding - Agree upon a basic "look and feel" for the underlying slide template. Match your presentation branding to your existing materials such as your logo, website, letter head etc.
2. Fixed Elements - There are fixed elements to all presentations such as subscription terms, manager bios, service providers, risk controls and contact information. Prepare a module of just these slides and keep it separate so you can easily insert this information into any new presentation.
3. Variable Elements - Create separate slides that introduce the fund's strategy, report performance to date, describe investment process and indicative trades. Amend these slides as the performance, process and sample trades change. Review periodically to make sure they reflect exactly what you would like to tell potential investors.
4. Know your Audience - Consider who your audience will be before you send or give your presentation. For example, many managers start their presentation with the investment case for hedge funds or commodity futures, etc. If you are talking to sophisticated hedge fund investors you should skip these slides. In this case the individuals on the other side of the table invest in hedge funds for a living and you are wasting time by going over basic and obvious information.
5. Show your Edge - Investors want to see that you are an expert in something specific. For example, a mortgage manager may have a few slides and anecdotes prepared on how to monetize the sub-prime debacle or a foreign exchange trader may offer insights into what's driving the dollar. Investors learn more about a manager’s investment ability when they hear them speaking intelligently and passionately on their area of expertise as opposed to giving a one dimensional overview of the fund.
Be prepared so that you will be well positioned to convert opportunities into allocations. Hide Tip
2. Fixed Elements - There are fixed elements to all presentations such as subscription terms, manager bios, service providers, risk controls and contact information. Prepare a module of just these slides and keep it separate so you can easily insert this information into any new presentation.
3. Variable Elements - Create separate slides that introduce the fund's strategy, report performance to date, describe investment process and indicative trades. Amend these slides as the performance, process and sample trades change. Review periodically to make sure they reflect exactly what you would like to tell potential investors.
4. Know your Audience - Consider who your audience will be before you send or give your presentation. For example, many managers start their presentation with the investment case for hedge funds or commodity futures, etc. If you are talking to sophisticated hedge fund investors you should skip these slides. In this case the individuals on the other side of the table invest in hedge funds for a living and you are wasting time by going over basic and obvious information.
5. Show your Edge - Investors want to see that you are an expert in something specific. For example, a mortgage manager may have a few slides and anecdotes prepared on how to monetize the sub-prime debacle or a foreign exchange trader may offer insights into what's driving the dollar. Investors learn more about a manager’s investment ability when they hear them speaking intelligently and passionately on their area of expertise as opposed to giving a one dimensional overview of the fund.
Be prepared so that you will be well positioned to convert opportunities into allocations. Hide Tip
- "Put the name of your fund in the subject line (when emailing an investor)."
- "Always think about how you can make life easy for your investors" (and make them look smart to their boss - LV addition)
- "If we say no (to investing into your fund) - don't argue"
- When calling a new investor - or anyone - always ask if they have time to talk. Do not launch right into the sales pitch."
- "Be consistent with your message and be able to put the presentation away and speak equally confidently about your process and investment edge"
Hedge Connection attended a cocktail party recently held by the NY Chapter of the CAIA organization. In a conversation with a multi-billion $USD FOF platform, we learned that each day his email inbox locks out as it reaches capacity. To repeat: his email inbox literally overflows with hedge fund marketing materials. The only way to manage this information flow is to whittle down the universe into a smaller subset that can be tracked by their team. To do so they focus on the four P's - People, Pedigree, Process and Performance.
The four P's will help you focus on what an investor needs to know in order to understand your organization.
People - Who are the key decision makers within your firm? how long have they been there? Have any left recently? Who are your references?
Pedigree - Where do the "Key people" come from? Do they have a previous track record? Where did they learn how to short for example? Is the pedigree verifiable? Any gaps? How is that explained?
Process - Is there an investment process that your fund follows? Define it clearly. Is it replicable in positive/negative market conditions? Has it been tested? How would it suffer from a key personnel disruption?
Performance - How is performance generated? Does the manager have an understanding of the risks generating performance? Does performance follow expectation in good/bad markets? How does it compare against its benchmark and comparable funds? Hide Tip
The four P's will help you focus on what an investor needs to know in order to understand your organization.
People - Who are the key decision makers within your firm? how long have they been there? Have any left recently? Who are your references?
Pedigree - Where do the "Key people" come from? Do they have a previous track record? Where did they learn how to short for example? Is the pedigree verifiable? Any gaps? How is that explained?
Process - Is there an investment process that your fund follows? Define it clearly. Is it replicable in positive/negative market conditions? Has it been tested? How would it suffer from a key personnel disruption?
Performance - How is performance generated? Does the manager have an understanding of the risks generating performance? Does performance follow expectation in good/bad markets? How does it compare against its benchmark and comparable funds? Hide Tip
In June Hedge Connection hosted our first annual networking event. The evening featured a 3-1 investor to hedge fund ratio. A unique observation when service providers tend to dominate industry conferences. We know of at least 2 allocations that came about from introductions at the event.
However, we are amazed at the feedback we received from investors at the event - specifically on the lack of follow-up from managers. One advisor to HNW clients indicated that only 1 of the 12 managers that passed out a card thought to follow-up with a phone call or email.
We shouldn't be surprised as managers are notoriously poor marketers, however, we assumed that a manager that would attend a networking event would be more inclined to follow-up. Apparently not.
Let's get back to basics:
1. Differentiate yourself: Rememeber to highlight how you are different, superior etc. to your competition. What is your edge?
2. As mentioned last month, investors are overwhelmed and inundated with email communication from hedge funds. You can't differentiate yourself by email or by a voicemail message . You must strive to have a conversation or face-to-face meeting. There is a tremendous amount of work that leads up to this important step.
3. In order to secure the face-to-face meeting you have to be diligent and organized in the management of your contact information. Too often we speak to managers and hear this, "I emailed them and they didn't get back to me." You must follow up with investors and make sure they recieved your email and then try to set up a call so that you can begin building the relationship.
4. You have to do the work. Do not expect your prime broker, attorney, friend or other intermediaries to manage the marketing process for you.
5. Respect the articulated wishes of the investor. Learn what they want in terms of delivery of information and frequency of communication. However, a non-response is not a no. You do not know the view of the investor vis-a-vis your fund until you speak to him/her.
Hedge Connection remains the most efficient means to identify active allocators to hedge funds. We know our investors well and are happy to provide insight and advice on how to approach. Please do not hesitate to contact us if you wish to discuss your marketing program further. Hide Tip
However, we are amazed at the feedback we received from investors at the event - specifically on the lack of follow-up from managers. One advisor to HNW clients indicated that only 1 of the 12 managers that passed out a card thought to follow-up with a phone call or email.
We shouldn't be surprised as managers are notoriously poor marketers, however, we assumed that a manager that would attend a networking event would be more inclined to follow-up. Apparently not.
Let's get back to basics:
1. Differentiate yourself: Rememeber to highlight how you are different, superior etc. to your competition. What is your edge?
2. As mentioned last month, investors are overwhelmed and inundated with email communication from hedge funds. You can't differentiate yourself by email or by a voicemail message . You must strive to have a conversation or face-to-face meeting. There is a tremendous amount of work that leads up to this important step.
3. In order to secure the face-to-face meeting you have to be diligent and organized in the management of your contact information. Too often we speak to managers and hear this, "I emailed them and they didn't get back to me." You must follow up with investors and make sure they recieved your email and then try to set up a call so that you can begin building the relationship.
4. You have to do the work. Do not expect your prime broker, attorney, friend or other intermediaries to manage the marketing process for you.
5. Respect the articulated wishes of the investor. Learn what they want in terms of delivery of information and frequency of communication. However, a non-response is not a no. You do not know the view of the investor vis-a-vis your fund until you speak to him/her.
Hedge Connection remains the most efficient means to identify active allocators to hedge funds. We know our investors well and are happy to provide insight and advice on how to approach. Please do not hesitate to contact us if you wish to discuss your marketing program further. Hide Tip
In preparing for our panel discussion at the October HedgeWorld investor Outlook Summit on "Managing Investor Expectations" we kept coming back to the idea of an investment as a relationship concept. We covered topics such as taking and acting on investor feedback and managing the information flow to a fund's investor base. The core essence of all responses, however, was that the relationship with the investor was paramount.
Examples:
1. Feedback: You want your investors to feel comfortable calling you. In the event that they offer feedback, do not get defensive and listen to what they are saying. Every manager has an ego and a lot of that ego is tied up in the fund, how it is structured and the performance. However, as a fellow panel member commented, "Investors have an ego too, and their ego is more important than yours."
2. Spawning: Another aspect is that investors move – a lot. Maintain strong bonds with the analysts as well as the Portfolio Managers and CIOs. While the analysts may not be the ultimate decision makers, they do appreciate looking smart to their boss and will remember this when they move to the next opportunity. We call this spawning – one investor becoming two…or more!
3. Communication: Building a relationship with an investor is built on trust. Trust is undermined by surprises. Take care to manage the information flow clearly to make sure that investors are not subject to ANY surprises. Examples are not limited to drawdowns. We have heard of managers that have encountered performance hiccups as a result of changing service providers and did not think of alerting their investors beforehand. Hide Tip
At the recent Absolute Return Symposium, a panel of managers and chief operating officers from prestigious hedge fund firms offered their insights on mistakes to avoid when establishing new hedge funds. The insights of these seasoned professionals provide an indication of how established shops meet the needs of their investors. The panel included senior management from Highbridge, Clovis Capital, Eton Park Capital Management and Halcyon Asset Management.
Some mistakes to avoid stated by the panel:
1. Do not allow personal trading – Everyone at the firm is expected to dedicate all of their investment energy to building the portfolios run by the firm. Managers should not be trading their personal account on the side. This type of trading activity opens up potential conflict of interest questions for investors.
2. Find someone that is charged with asking tough questions – Empower independent voices within your organization. While you never want too many chefs in the kitchen, you never know from where a great idea may come. This comment also points to the growing importance of having a COO to focus on all non-investment related issues. Often these issues are mundane, yet very important and should be given the attention they deserve from a dedicated high-level member of the firm.
3. Be careful about how you use soft dollars – There is a lot of controversy about the use of soft dollars. Make sure that you have checked with your attorney about how you are allowed to use soft dollars. Typically you must disclose in your documents exactly what services you will be paying for using soft dollars. The main point is that you want to maintain a conflict free environment that gives investors confidence in what you are doing.
4. In times of calm prepare for crisis – The most successful managers are those who are prepared for the worst-case scenario. It is invaluable to spend time securing financing capacity, establish policies and procedures and add infrastructure so that you can handle any type of crisis that may come your way. Hide Tip
Some mistakes to avoid stated by the panel:
1. Do not allow personal trading – Everyone at the firm is expected to dedicate all of their investment energy to building the portfolios run by the firm. Managers should not be trading their personal account on the side. This type of trading activity opens up potential conflict of interest questions for investors.
2. Find someone that is charged with asking tough questions – Empower independent voices within your organization. While you never want too many chefs in the kitchen, you never know from where a great idea may come. This comment also points to the growing importance of having a COO to focus on all non-investment related issues. Often these issues are mundane, yet very important and should be given the attention they deserve from a dedicated high-level member of the firm.
3. Be careful about how you use soft dollars – There is a lot of controversy about the use of soft dollars. Make sure that you have checked with your attorney about how you are allowed to use soft dollars. Typically you must disclose in your documents exactly what services you will be paying for using soft dollars. The main point is that you want to maintain a conflict free environment that gives investors confidence in what you are doing.
4. In times of calm prepare for crisis – The most successful managers are those who are prepared for the worst-case scenario. It is invaluable to spend time securing financing capacity, establish policies and procedures and add infrastructure so that you can handle any type of crisis that may come your way. Hide Tip
The inconvenient truth is that if you are a manager, and you approach a seeder, you will be rejected 99% of the time. In other words, we have heard it said, “If you want them they probably do not want you." The clear message from industry experts was that they are looking for managers that do not “need” them but would benefit in the short term to get out of the gate. According to some of the major seeders such as Skybridge, Weston and MD Sass, out of the 600-800 hedge fund managers they review each year, they will invest in only 1-2. These are not attractive odds.
Before you approach, or preferably, seek introduction to a seeder – review what you have to offer from their perspective.
1. Capacity: Absolutely critical - seeders are venture capitalists and are looking for strategies that have the capacity to grow and can ramp up relatively quickly. I have heard $700 million in 5 years thrown out as one example.
2. Due Diligence: Seeders are looking for managers that have a business plan and know what they want from seed providers. The seeding groups are not monolithic – some are passive capital, some provide infrastructure and others will offer marketing support. Understand what it is exactly that you want from a seed partner. The goal of a meeting with a seeder is NOT to run through the strategy, lean back and ask "what do you think?" but to have a very specific conversation based on your understanding of their model and what you want. Remember that they will ultimately be your business partner.
3. Business Plan: As they are effectively venture capitalists, understand that they will be curious to see your business plan across a 3-5 year timeline. After all, seeders become a business partner and attach their reputation and capital to the success of your enterprise.
4. Will it sell?: Outside investment remains critical to the success of the partnership. A perfect score on points 1-3 will still fail if the seed firm comes to the conclusion that the fund will be a difficult sell. This is particularly true for seed arrangements that have buyout provisions. The manager must have sufficient capital to buy out the seeder. points to consider:
a. Manager pedigree – Did the manager come from another hedge fund or investment bank? What is the manager’s pedigree and is he viewed as an expert in his field?
b. Complex nature of the strategy – If a strategy is too complex and difficult to sell to investors a seed provider may opt not to make an investment. For example, quant strategies, mortgage and systematic trading systems are tough sells.
c. Location – Investors have to do due diligence and site visits as part of the investment process. The location of your office may impact your ability to raise capital as investors cannot travel everywhere.
d. Have an office – Virtual operations are not acceptable if you are trying to build a successful hedge fund business. Spend time and money to create a solid business including infrastructure if you want to be taken seriously by investors and seed providers.
e. Balance strategy vs. capacity – Analyze your strategy and be honest with yourself and the seed provided about your capacity. Seeders want capacity.
It is exceedingly tough to successfully enter into a seed arrangement with one of the major seed platforms. However, there are other options that may work as well. On Hedge Connection a number of investors have indicated a willingness to take small equity stakes in new managers. Use the search feature and query the investor membership for "Investor Seeds Hedge Funds." Hide Tip
Before you approach, or preferably, seek introduction to a seeder – review what you have to offer from their perspective.
1. Capacity: Absolutely critical - seeders are venture capitalists and are looking for strategies that have the capacity to grow and can ramp up relatively quickly. I have heard $700 million in 5 years thrown out as one example.
2. Due Diligence: Seeders are looking for managers that have a business plan and know what they want from seed providers. The seeding groups are not monolithic – some are passive capital, some provide infrastructure and others will offer marketing support. Understand what it is exactly that you want from a seed partner. The goal of a meeting with a seeder is NOT to run through the strategy, lean back and ask "what do you think?" but to have a very specific conversation based on your understanding of their model and what you want. Remember that they will ultimately be your business partner.
3. Business Plan: As they are effectively venture capitalists, understand that they will be curious to see your business plan across a 3-5 year timeline. After all, seeders become a business partner and attach their reputation and capital to the success of your enterprise.
4. Will it sell?: Outside investment remains critical to the success of the partnership. A perfect score on points 1-3 will still fail if the seed firm comes to the conclusion that the fund will be a difficult sell. This is particularly true for seed arrangements that have buyout provisions. The manager must have sufficient capital to buy out the seeder. points to consider:
a. Manager pedigree – Did the manager come from another hedge fund or investment bank? What is the manager’s pedigree and is he viewed as an expert in his field?
b. Complex nature of the strategy – If a strategy is too complex and difficult to sell to investors a seed provider may opt not to make an investment. For example, quant strategies, mortgage and systematic trading systems are tough sells.
c. Location – Investors have to do due diligence and site visits as part of the investment process. The location of your office may impact your ability to raise capital as investors cannot travel everywhere.
d. Have an office – Virtual operations are not acceptable if you are trying to build a successful hedge fund business. Spend time and money to create a solid business including infrastructure if you want to be taken seriously by investors and seed providers.
e. Balance strategy vs. capacity – Analyze your strategy and be honest with yourself and the seed provided about your capacity. Seeders want capacity.
It is exceedingly tough to successfully enter into a seed arrangement with one of the major seed platforms. However, there are other options that may work as well. On Hedge Connection a number of investors have indicated a willingness to take small equity stakes in new managers. Use the search feature and query the investor membership for "Investor Seeds Hedge Funds." Hide Tip
We are experiencing a substantial financial crisis that began last year with the meltdown of the housing market, subprime mortgage market and credit markets. Investors have had to reevaluate how they assess the investments they are making. Even though many of them have been frozen while they try to figure out where they stand with their own portfolios, they do still have to keep their eye on the ball and continue to explore new sources of alpha.
Investors are being extremely selective about what they are looking at now. In this type of environment it is more critical than ever to be able to differentiate yourself to investors. If you are a L/S fund, it is going to be much more difficult to get their attention. You are competing with thousands of similar funds and you must be able to clearly define your edge. If you are a strategy that is a niche strategy, then you will have an easier time at getting investor attention now. If you are a fund that has experience investing in the mortgage market and you do not have any major legacy issues, you will probably be able to get the attention of investors too. They want to learn about that market, what types of changes are occurring and what opportunities are available to them.
You should take this time to reevaluate how you are telling your story and work hard at making it as clear, concise and targeted as possible. If you do not have a DDQ, or if your DDQ is outdated, now is the time to create one or update the existing one. Going forward this document will become one of your primary marketing tools. As investors get more sophisticated and expect more transparency from hedge funds, they will insist on having a copy of your DDQ before moving forward with meetings. If you do not have a newsletter, start to write one at least bi-annually. This is a great way for you to get an investor comfortable with you, your fund and how you look at the market etc. If you can give investors information on a consistent basis that becomes one of their research sources for your market, they will call you when they have a question and your relationship will blossom.
Keep in mind that during crisis periods everyone is hungry for information that will help them make good investment decisions. Use this time to build trust and make your investor prospects smarter. It will come back to you in spades when they are ready to invest.
To get more insight into this critical topic join us at our June 24th event:
Hedge Fund Investor Summit: Searching for the Next Generation of Alpha
It not only offers insight into what investors are looking at now, it is a great networking opportunity.
Hide Tip
Investors are being extremely selective about what they are looking at now. In this type of environment it is more critical than ever to be able to differentiate yourself to investors. If you are a L/S fund, it is going to be much more difficult to get their attention. You are competing with thousands of similar funds and you must be able to clearly define your edge. If you are a strategy that is a niche strategy, then you will have an easier time at getting investor attention now. If you are a fund that has experience investing in the mortgage market and you do not have any major legacy issues, you will probably be able to get the attention of investors too. They want to learn about that market, what types of changes are occurring and what opportunities are available to them.
You should take this time to reevaluate how you are telling your story and work hard at making it as clear, concise and targeted as possible. If you do not have a DDQ, or if your DDQ is outdated, now is the time to create one or update the existing one. Going forward this document will become one of your primary marketing tools. As investors get more sophisticated and expect more transparency from hedge funds, they will insist on having a copy of your DDQ before moving forward with meetings. If you do not have a newsletter, start to write one at least bi-annually. This is a great way for you to get an investor comfortable with you, your fund and how you look at the market etc. If you can give investors information on a consistent basis that becomes one of their research sources for your market, they will call you when they have a question and your relationship will blossom.
Keep in mind that during crisis periods everyone is hungry for information that will help them make good investment decisions. Use this time to build trust and make your investor prospects smarter. It will come back to you in spades when they are ready to invest.
To get more insight into this critical topic join us at our June 24th event:
Hedge Fund Investor Summit: Searching for the Next Generation of Alpha
It not only offers insight into what investors are looking at now, it is a great networking opportunity.
Hide Tip
Investor Sentiment:
Only 7% of investors are feeling bullish for 2008.
40% expect the global economy to pick up in 2009.
The four major manager selection criteria that investors are now pointing to are:
Investment Performance
Investment Philosophy
Risk Management
Manager’s Pedigree
While flows into hedge funds have been the lowest of any first quarter in four years ($6.5 billion) investors suggested a median industry inflow of $200 billion in 2008.
Leverage:
58% of investors would not consider applying leverage to their portfolios.
2% are interested but have not yet done so.
30% of investors are actively leveraging their portfolios.
6% are actively leveraging their portfolios through structured products.
Transparency:
69% of investors request performance, risk exposures, asset classes, regional breakdown, largest positions, and industry breakdown.
Lock-Up:
47% of Banks, Corporations and Insurance Companies can accept a one-year lock-up.
One year is the most common and acceptable lock-up for Consultants and Family Offices, High Net Worth Individuals and Wealth Management Companies.
Investors in the Americas accept longer lock-ups more readily than investors in other regions.
Overall, a one-year lock-up appears to be the most commonly accepted term, however this could vary by strategy.
Liquidity:
After the initial lock-up, 48% of investors require quarterly liquidity or better.
20% requiring monthly liquidity.
Respondents in Asia and Europe are three times more likely to require monthly liquidity than those in the Americas.
Quarterly liquidity remains the most commonly required withdrawal term for investors across all regions.
Day One Investors:
2007: 77% of investors indicated that under appropriate circumstances with the right manager, they were early allocators (day one investors or seeders).
2008: this number fell to 52%
Managed Accounts:
The percentage of investors who would invest through managed/segregated accounts has increased, from 34% in 2007 to 43% in 2008. This is perhaps indicative of investors’ increased focus on risk management, liquidity and a desire for full transparency.
Initial Allocations:
Investors in the Americas and Europe make the largest initial allocations.
Asian allocations are about half the size.
Funds of Funds hold the most hedge funds in their portfolio.
Pensions, Endowments and Foundations hold the least hedge funds in their portfolio.
Funds of Funds typically rebalance their portfolios once a month.
Pensions, Endowments and Foundations rebalance once a year.
Funds of Funds make twice as many follow-on allocations as initial allocations and more are likely to make a partial redemption than a full redemption than any other investor group.
More than 20% of Investors that use Consultants take over one year to make an investment decision. While those that do not use consultants report they take an average of three to six months from first meeting with a hedge fund to investment.
95% of investors report they include some type of equity strategy in their portfolio.
Most favorite strategy: 60% of investors responded that they would invest in Distressed this year.
Least favorite strategy: 30% of investors said they would reduce allocations to Merger Arbitrage this year. Hide Tip
Only 7% of investors are feeling bullish for 2008.
40% expect the global economy to pick up in 2009.
The four major manager selection criteria that investors are now pointing to are:
Investment Performance
Investment Philosophy
Risk Management
Manager’s Pedigree
While flows into hedge funds have been the lowest of any first quarter in four years ($6.5 billion) investors suggested a median industry inflow of $200 billion in 2008.
Leverage:
58% of investors would not consider applying leverage to their portfolios.
2% are interested but have not yet done so.
30% of investors are actively leveraging their portfolios.
6% are actively leveraging their portfolios through structured products.
Transparency:
69% of investors request performance, risk exposures, asset classes, regional breakdown, largest positions, and industry breakdown.
Lock-Up:
47% of Banks, Corporations and Insurance Companies can accept a one-year lock-up.
One year is the most common and acceptable lock-up for Consultants and Family Offices, High Net Worth Individuals and Wealth Management Companies.
Investors in the Americas accept longer lock-ups more readily than investors in other regions.
Overall, a one-year lock-up appears to be the most commonly accepted term, however this could vary by strategy.
Liquidity:
After the initial lock-up, 48% of investors require quarterly liquidity or better.
20% requiring monthly liquidity.
Respondents in Asia and Europe are three times more likely to require monthly liquidity than those in the Americas.
Quarterly liquidity remains the most commonly required withdrawal term for investors across all regions.
Day One Investors:
2007: 77% of investors indicated that under appropriate circumstances with the right manager, they were early allocators (day one investors or seeders).
2008: this number fell to 52%
Managed Accounts:
The percentage of investors who would invest through managed/segregated accounts has increased, from 34% in 2007 to 43% in 2008. This is perhaps indicative of investors’ increased focus on risk management, liquidity and a desire for full transparency.
Initial Allocations:
Investors in the Americas and Europe make the largest initial allocations.
Asian allocations are about half the size.
Funds of Funds hold the most hedge funds in their portfolio.
Pensions, Endowments and Foundations hold the least hedge funds in their portfolio.
Funds of Funds typically rebalance their portfolios once a month.
Pensions, Endowments and Foundations rebalance once a year.
Funds of Funds make twice as many follow-on allocations as initial allocations and more are likely to make a partial redemption than a full redemption than any other investor group.
More than 20% of Investors that use Consultants take over one year to make an investment decision. While those that do not use consultants report they take an average of three to six months from first meeting with a hedge fund to investment.
95% of investors report they include some type of equity strategy in their portfolio.
Most favorite strategy: 60% of investors responded that they would invest in Distressed this year.
Least favorite strategy: 30% of investors said they would reduce allocations to Merger Arbitrage this year. Hide Tip
Managers Pitch to Pickier Clients
By Chidem Kurdas, New York Bureau Chief
Tuesday, July 29, 2008
This is the fourth in a series of articles on raising money for hedge funds.
NEW YORK (HedgeWorld.com)If you build it, the money will come. If that was ever true for hedge funds, it certainly is not any more. Capital has become harder to get and to succeed on this front managers need to work on it.
HedgeWorld asked Lisa Vioni for tips on approaching investors. Ms. Vioni was director of marketing at two different hedge fundsa startup and the well-established mortgage manager Ellington Management Group LLC. She is currently chief executive of Hedge Connection Inc., a provider of investor information and networking.
HedgeWorld: What feedback do you get from managers about raising capital?
Lisa Vioni: We're at a difficult economic point where many investors have lost money and are not sure how much capital they'll have to allocate. So investment is partly frozen, though there is money on the sidelines. On the other hand, there are always market cycles and investors always make bad as well as good investments. Through it all, what matters for hedge fund marketing is to take the time to build relationships. In any economic situation, it takes time to get an allocation.
HW: Do people make mistakes in approaching investors?
LV: Managers can be impatient. They read in the news that a new fund launched with several billion dollars and think it should happen to them. In fact there are very few large startups, but those get attention in the press. It's a long, arduous process to start any new business. Why should hedge funds be different? Raising money for a fund requires building trust.
HW: How can funds build relations with investors?
LV: What I tell managers is to be sensitive to the fact that the person you're talking with may have just lost 20% of an investment in some fund. So don't start by asking whether they have money to put into your fund. Instead you might discuss the latest developments in the market you know and offer your insight. Use your expertise to help the investor understand the situation so they can make better investment decisions. If they learn something from you, they're more likely to want to talk with you. At some point you might ask where they are in their allocating process.
HW: Why do some funds with solid performance fail to raise capital?
LV: One problem is that many managers don't know where marketing fits into their business plan. They think that if they have good performance, the money will just come. It goes without saying you need good performance, but it is a misconception that marketing is not important, that the money will automatically find you. There is too much competition. Managers should dedicate resources to marketing.
HW: Have you noticed any recent pattern in your investor database?
LV: Investors continue to come into our database. We're very picky about whom we let in70% or 75% of the applicants do not meet our criteria so they don't get into the database. We have almost 800 investors from 35 countries. The membership is mainly family offices, 30%, and funds of funds, 35%. Advisers to high-net-worth investors are around 10%. Endowments, foundations, pensions and insurance companies account for most of the rest.
HW: What kinds of funds use your site?
LV: They vary from small startups to a $1.7 billion firm with a long track record that recently signed up with us.
HW: Which strategies are investors now more interested in?
LV: Right now they're more interested in niche strategies. They want to hear how a mortgage fund is taking advantage of the dislocation or what opportunities an asset-backed lending manager is pursuing. Funds with a specialized focus are having an easier time getting investor attention. It's much harder for a long/short equity manager. Sometimes an investor wants to meet a manager because they want to learn about a new strategysay clean technology investing. So it does not necessarily mean that they will invest. But the manager has a chance to acquaint the investor with the fund.
HW: You've been at both a startup and an established hedge fund. Is it easier in a larger firm?
LV: No, it is not. Raising money is always hard work because there is a lot of competition even for a large fund and investors don't go away after they give you the moneyyou need to provide information and handle any questions they have.
HW: What's your advice to managers for getting investor attention?
LV: More than ever before, managers need to figure out what their edge is and how they are different. In this environment, investors are interested in managers who have special skills, can explain what's going on in a less familiar market. Hide Tip
By Chidem Kurdas, New York Bureau Chief
Tuesday, July 29, 2008
This is the fourth in a series of articles on raising money for hedge funds.
NEW YORK (HedgeWorld.com)If you build it, the money will come. If that was ever true for hedge funds, it certainly is not any more. Capital has become harder to get and to succeed on this front managers need to work on it.
HedgeWorld asked Lisa Vioni for tips on approaching investors. Ms. Vioni was director of marketing at two different hedge fundsa startup and the well-established mortgage manager Ellington Management Group LLC. She is currently chief executive of Hedge Connection Inc., a provider of investor information and networking.
HedgeWorld: What feedback do you get from managers about raising capital?
Lisa Vioni: We're at a difficult economic point where many investors have lost money and are not sure how much capital they'll have to allocate. So investment is partly frozen, though there is money on the sidelines. On the other hand, there are always market cycles and investors always make bad as well as good investments. Through it all, what matters for hedge fund marketing is to take the time to build relationships. In any economic situation, it takes time to get an allocation.
HW: Do people make mistakes in approaching investors?
LV: Managers can be impatient. They read in the news that a new fund launched with several billion dollars and think it should happen to them. In fact there are very few large startups, but those get attention in the press. It's a long, arduous process to start any new business. Why should hedge funds be different? Raising money for a fund requires building trust.
HW: How can funds build relations with investors?
LV: What I tell managers is to be sensitive to the fact that the person you're talking with may have just lost 20% of an investment in some fund. So don't start by asking whether they have money to put into your fund. Instead you might discuss the latest developments in the market you know and offer your insight. Use your expertise to help the investor understand the situation so they can make better investment decisions. If they learn something from you, they're more likely to want to talk with you. At some point you might ask where they are in their allocating process.
HW: Why do some funds with solid performance fail to raise capital?
LV: One problem is that many managers don't know where marketing fits into their business plan. They think that if they have good performance, the money will just come. It goes without saying you need good performance, but it is a misconception that marketing is not important, that the money will automatically find you. There is too much competition. Managers should dedicate resources to marketing.
HW: Have you noticed any recent pattern in your investor database?
LV: Investors continue to come into our database. We're very picky about whom we let in70% or 75% of the applicants do not meet our criteria so they don't get into the database. We have almost 800 investors from 35 countries. The membership is mainly family offices, 30%, and funds of funds, 35%. Advisers to high-net-worth investors are around 10%. Endowments, foundations, pensions and insurance companies account for most of the rest.
HW: What kinds of funds use your site?
LV: They vary from small startups to a $1.7 billion firm with a long track record that recently signed up with us.
HW: Which strategies are investors now more interested in?
LV: Right now they're more interested in niche strategies. They want to hear how a mortgage fund is taking advantage of the dislocation or what opportunities an asset-backed lending manager is pursuing. Funds with a specialized focus are having an easier time getting investor attention. It's much harder for a long/short equity manager. Sometimes an investor wants to meet a manager because they want to learn about a new strategysay clean technology investing. So it does not necessarily mean that they will invest. But the manager has a chance to acquaint the investor with the fund.
HW: You've been at both a startup and an established hedge fund. Is it easier in a larger firm?
LV: No, it is not. Raising money is always hard work because there is a lot of competition even for a large fund and investors don't go away after they give you the moneyyou need to provide information and handle any questions they have.
HW: What's your advice to managers for getting investor attention?
LV: More than ever before, managers need to figure out what their edge is and how they are different. In this environment, investors are interested in managers who have special skills, can explain what's going on in a less familiar market. Hide Tip
1. Negative selection bias of seeding is gone.
As recently as a few years ago, a common adage was that if you needed seed capital and were willing to give away economics (revenue share, equity or both) then the fund wasn’t top tier. Therefore there was a negative selection bias in the seeders portfolios. That is no longer the case. The cost of hiring and retaining talent in combination with the challenges of marketing all make seeding a desired way to launch a fund.
“A few years ago we used to hear, ‘All the good managers can raise money themselves – only the leftovers need you’ (adverse selection) – this concept has flipped almost 180 degrees. Substantial institutional investors now want to know that a manager has all the attributes of a real business. They want to know that business has sustainable capital and that the manager won’t run out of gas and go out of business in 2-3 years.”–MD Sass
2. Investing in businesses, not funds:
Seeders could not stress enough the concept that they are looking to invest in businesses and view their investment as a PE or VC transaction. One of their main concerns is finding out if the team knows how to run a business.
“Businesses tend to succeed based on how businesses are adapted to their circumstances. For example, there are areas where scale is an advantage and there are opportunities where scale is not an advantage. There is a competitive dynamic – who needs another hedge fund? why this? why now? why me? Don’t look to do something to answer demand. Demand is fickle.” – Cabezon Capital
3. Different models exist.
There is a wide and complex spectrum of different arrangements that can be struck with a seed capital provider. From office space, infrastructure and marketing support to passive capital. The manager should understand what he wants before approaching the seeder.
“We provide seed capital at an early stage of the business life cycle. We take a percentage of performance fee and management fee and typically leave breathing room – as the fund grows, the percentage sinks. We negotiate risk constraints that allow us to be clear on what we will and will not tolerate. We expect to receive daily transparency. We have a minimum asset size for a buyout and a floor considered ahead of time.” –AIG/Larch Lane
4. There is fierce competition for capital.
Seeders are inundated by proposals, are selective with investments and have high IRR return objectives. They are generally looking for managers with strong pedigrees and strategies that can be scaled. An indicative comment: "We look at 600-800 deals a year…300-400 are garbage…we will ultimately invest in 1-2” - Capital Z Hide Tip
As recently as a few years ago, a common adage was that if you needed seed capital and were willing to give away economics (revenue share, equity or both) then the fund wasn’t top tier. Therefore there was a negative selection bias in the seeders portfolios. That is no longer the case. The cost of hiring and retaining talent in combination with the challenges of marketing all make seeding a desired way to launch a fund.
“A few years ago we used to hear, ‘All the good managers can raise money themselves – only the leftovers need you’ (adverse selection) – this concept has flipped almost 180 degrees. Substantial institutional investors now want to know that a manager has all the attributes of a real business. They want to know that business has sustainable capital and that the manager won’t run out of gas and go out of business in 2-3 years.”–MD Sass
2. Investing in businesses, not funds:
Seeders could not stress enough the concept that they are looking to invest in businesses and view their investment as a PE or VC transaction. One of their main concerns is finding out if the team knows how to run a business.
“Businesses tend to succeed based on how businesses are adapted to their circumstances. For example, there are areas where scale is an advantage and there are opportunities where scale is not an advantage. There is a competitive dynamic – who needs another hedge fund? why this? why now? why me? Don’t look to do something to answer demand. Demand is fickle.” – Cabezon Capital
3. Different models exist.
There is a wide and complex spectrum of different arrangements that can be struck with a seed capital provider. From office space, infrastructure and marketing support to passive capital. The manager should understand what he wants before approaching the seeder.
“We provide seed capital at an early stage of the business life cycle. We take a percentage of performance fee and management fee and typically leave breathing room – as the fund grows, the percentage sinks. We negotiate risk constraints that allow us to be clear on what we will and will not tolerate. We expect to receive daily transparency. We have a minimum asset size for a buyout and a floor considered ahead of time.” –AIG/Larch Lane
4. There is fierce competition for capital.
Seeders are inundated by proposals, are selective with investments and have high IRR return objectives. They are generally looking for managers with strong pedigrees and strategies that can be scaled. An indicative comment: "We look at 600-800 deals a year…300-400 are garbage…we will ultimately invest in 1-2” - Capital Z Hide Tip
Hedge Connection announces the beta launch of the first professional event networking website: www.Leebug.com
As fall begins, the conference scene becomes active and many hedge fund managers wonder if they should spend money attending the myriad conferences for which they will be solicited. Participating in conferences can be a good way to network, but it is time consuming, expensive and unpredictable. Up until now, it has been nearly impossible to make the most out of networking at any convention because conference companies will not give out attendee lists or facilitate networking before an event. Even those conferences that have an internal networking system have problems including the time consuming nature of creating profiles for each individual conference.
Hedge Connection is excited to introduce Leebug.com, a new and one of a kind social networking site that enables its’ members to network before, during and after any conference whether they are attending that conference or not. Membership is free, and like other social networking sites, only takes a few minutes to create a profile and start gathering contacts and inviting friends. Once an account is created, you can immediately begin to collect important information on conferences around the world, network and build groups of industry professionals. At Leebug.com you only have to go to one site and create one profile to be able to network at any conference that exists. If there is a conference that you are attending that is not posted, you can simply post it yourself and start inviting friends who you know are attending or who would be interested in networking. You don’t have to be going to a conference to be able to network with conference attendees. This means you can network at any conference without even attending. Or perhaps you want to set up a cocktail party and invite people from a particular conference. You can do this by creating a Meet Up. By using Leebug.com you enhance your conference experience and can start doing some serious networking right away.
Tell your friends about Leebug.com. The more people who start to use the site, the more people you will be able to meet and network with at each event. While in beta testing mode Leebug would love to hear your feedback and ideas of how to improve the site.
Join today and start preparing now for the upcoming conferences you may be attending like the GAIM NY Fund of Funds conference in October, MAR’s Bermuda conference or the many conferences hosted by FRA. Hide Tip
As fall begins, the conference scene becomes active and many hedge fund managers wonder if they should spend money attending the myriad conferences for which they will be solicited. Participating in conferences can be a good way to network, but it is time consuming, expensive and unpredictable. Up until now, it has been nearly impossible to make the most out of networking at any convention because conference companies will not give out attendee lists or facilitate networking before an event. Even those conferences that have an internal networking system have problems including the time consuming nature of creating profiles for each individual conference.
Hedge Connection is excited to introduce Leebug.com, a new and one of a kind social networking site that enables its’ members to network before, during and after any conference whether they are attending that conference or not. Membership is free, and like other social networking sites, only takes a few minutes to create a profile and start gathering contacts and inviting friends. Once an account is created, you can immediately begin to collect important information on conferences around the world, network and build groups of industry professionals. At Leebug.com you only have to go to one site and create one profile to be able to network at any conference that exists. If there is a conference that you are attending that is not posted, you can simply post it yourself and start inviting friends who you know are attending or who would be interested in networking. You don’t have to be going to a conference to be able to network with conference attendees. This means you can network at any conference without even attending. Or perhaps you want to set up a cocktail party and invite people from a particular conference. You can do this by creating a Meet Up. By using Leebug.com you enhance your conference experience and can start doing some serious networking right away.
Tell your friends about Leebug.com. The more people who start to use the site, the more people you will be able to meet and network with at each event. While in beta testing mode Leebug would love to hear your feedback and ideas of how to improve the site.
Join today and start preparing now for the upcoming conferences you may be attending like the GAIM NY Fund of Funds conference in October, MAR’s Bermuda conference or the many conferences hosted by FRA. Hide Tip
Marketing 101 reminds us to focus on Voice, Message and Audience. Your marketing budget should focus on these areas.
Voice/Message
- Can you quickly and succinctly explain your investment strategy? Can you articulate your investment edge? Do you struggle with delineating between public vs. private explanations of your investment pitch? Do you demonstrate a passion for your fund and strategy? Can you identify an opportunity in your market?
If not, it may make sense to hire a marketing consultant to help craft your message and create a presentation that appeals to what investors are looking for. Investors require a consist and clear message. When you do finally get that opportunity to present your fund to an investor, you must be prepared. Make sure that your marketing consultant has a background in hedge fund marketing and has been successful raising capital. Check pedigree and ask for references.
- Are your materials professional? Do you have a logo? Branding palate? Presentation template? DDQ? Website?
If not – you may wish to hire a branding/design firm to help create a visual template. Visual cues are powerful and work in the subconscious. Having a consistent look gives an impression of being organized and professional You want to put your best foot forward and money spent on design early is money saved later.
Audience:
This is the most challenging part of the marketing process. How do you get in front of that elusive investor audience to build relationships and pitch your fund? There are a lot of people selling lists, “premium access” to various databases and selling high expectation for conference participation or external marketers that offer representation. Many make it seem like if you buy their list, you will raise money. Getting a name doesn’t guarantee anything. Key questions to ask:
Hedge Connection regularly helps our members address these and many other issues. Our investor members are opt-in and legally qualified. We have helped many funds successfully craft their message and meet investors. Feel free to contact us if you have any questions. Hide Tip
Voice/Message
- Can you quickly and succinctly explain your investment strategy? Can you articulate your investment edge? Do you struggle with delineating between public vs. private explanations of your investment pitch? Do you demonstrate a passion for your fund and strategy? Can you identify an opportunity in your market?
If not, it may make sense to hire a marketing consultant to help craft your message and create a presentation that appeals to what investors are looking for. Investors require a consist and clear message. When you do finally get that opportunity to present your fund to an investor, you must be prepared. Make sure that your marketing consultant has a background in hedge fund marketing and has been successful raising capital. Check pedigree and ask for references.
- Are your materials professional? Do you have a logo? Branding palate? Presentation template? DDQ? Website?
If not – you may wish to hire a branding/design firm to help create a visual template. Visual cues are powerful and work in the subconscious. Having a consistent look gives an impression of being organized and professional You want to put your best foot forward and money spent on design early is money saved later.
Audience:
This is the most challenging part of the marketing process. How do you get in front of that elusive investor audience to build relationships and pitch your fund? There are a lot of people selling lists, “premium access” to various databases and selling high expectation for conference participation or external marketers that offer representation. Many make it seem like if you buy their list, you will raise money. Getting a name doesn’t guarantee anything. Key questions to ask:
- Has the list been legally qualified?
- Will this list provide direct access to investors?
- How many investors can be accessed and who are they?
- Are you comfortable with regulatory implications when reaching out to these investors? Remember, if you don’t have a pre-existing relationship technically you are not suppose to be calling investors.
- When spending marketing dollars will you be establishing a partnership with a group that is going to help you build a business or do they take your money and then ignore you?
Hedge Connection regularly helps our members address these and many other issues. Our investor members are opt-in and legally qualified. We have helped many funds successfully craft their message and meet investors. Feel free to contact us if you have any questions. Hide Tip
All panelists, hedge funds and investors alike, spoke of patience and empathy to the confusion and pain that investors are experiencing right now. This is not the environment for the hard sell. In fact, it could destroy any relationship that you have developed. It is critical that fund principals and portfolio managers understand that this is a challenging period to receive new assets. If you lay the proper groundwork in the first half of the year you may be in a position to be considered for a meeting or allocation in the second half…the near consensus period when $$ will come back into the space if things begin to settle. Focus communications efforts on the following:
1. Educate: The monthly/quarterly letter is the most underutilized piece of marketing collateral. If you don’t provide monthly or quarterly commentary it is time to start. If you do, it may be the time to review what you are using and make a determination whether you can enhance the format and content and provide detailed analysis and perspective on the strategy and/or asset class that you trade. Remember: if you educate them, you own them.
2. News from the front: Investors are frozen and feel as if the ground is shifting under their feet. Basic assumptions that have underpinned their asset allocation, portfolio management and risk management systems are being re-evaluated. They want to know what others are doing and what others are saying. In our investor calls, we are constantly asked, “What are you hearing?” When you pick up the phone to speak to an investor or prospect, be prepared with some useful insights that you have heard from others in your sector, your investor base or investor contacts.
3. Ask questions: A number of investors at the conference mentioned how off-putting it was that managers would launch directly into the pitch without first gauging whether a prospect may be interested or whether the portfolio would benefit from such a strategy. Some questions to ask to strart a conversation: Is there anything I can do to help you better understand my specific strategy/market? What do you need to accomplish in your portfolio? Are you looking at new managers? Are you looking to add new strategies this year? What is the status of your redemption requests? What are you hearing from your end investors? Are my marketing materials useful or would you like more detailed information on my sector and what I do?
It will be a difficult year. Investors, who have half as much time as they used to and fewer resources,, will remember those that helped them, not those that made their lives more challenging. Hide Tip
1. Educate: The monthly/quarterly letter is the most underutilized piece of marketing collateral. If you don’t provide monthly or quarterly commentary it is time to start. If you do, it may be the time to review what you are using and make a determination whether you can enhance the format and content and provide detailed analysis and perspective on the strategy and/or asset class that you trade. Remember: if you educate them, you own them.
2. News from the front: Investors are frozen and feel as if the ground is shifting under their feet. Basic assumptions that have underpinned their asset allocation, portfolio management and risk management systems are being re-evaluated. They want to know what others are doing and what others are saying. In our investor calls, we are constantly asked, “What are you hearing?” When you pick up the phone to speak to an investor or prospect, be prepared with some useful insights that you have heard from others in your sector, your investor base or investor contacts.
3. Ask questions: A number of investors at the conference mentioned how off-putting it was that managers would launch directly into the pitch without first gauging whether a prospect may be interested or whether the portfolio would benefit from such a strategy. Some questions to ask to strart a conversation: Is there anything I can do to help you better understand my specific strategy/market? What do you need to accomplish in your portfolio? Are you looking at new managers? Are you looking to add new strategies this year? What is the status of your redemption requests? What are you hearing from your end investors? Are my marketing materials useful or would you like more detailed information on my sector and what I do?
It will be a difficult year. Investors, who have half as much time as they used to and fewer resources,, will remember those that helped them, not those that made their lives more challenging. Hide Tip
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