Published on FINalternatives (http://www.finalternatives.com)

Guest Post: Ron Suber is senior partner and head of global sales and marketing for Merlin Securities, a leading prime brokerage services and technology provider for hedge funds and managed account platforms.  The following was published on FINalternatives and is based on a presentation by Ron Suber at Hedge Funds: Getting to the Next Level, hosted by FINalternatives and the Capital Markets Consortium on February 18, 2010.

Not long ago, pre-2008, hedge fund managers held relative power over investors. Because demand for their products was so high across a range of strategies, they controlled the terms, often with little transparency and very favorable gating provisions.

Recent market events and a general scarcity of investors has shifted the power to the investor. While raising and retaining institutional capital has always been challenging, in today’s environment hedge fund managers must be more diligent than ever in clearly defining and explaining their process, controls and their differentiation. Worries about performance are now often eclipsed by other concerns such as volatility, liquidity, attribution, transparency and, of course, fraud.

The following checklist – we call it the Merlin Necessary Nine – is designed to help hedge fund managers understand and articulate their edge to institutional investors.

1. Convey how your process, performance and Alpha generation is repeatable. Institutions don’t make decisions based on short-term performance, so if you have less than a 2-year track record be prepared to explain clearly and with great detail how your fund will perform throughout the full market cycle and under periods of unique economic duress and volatility. Needless to say, given the turbulence of the past few years, this is top-of-mind for institutions.

2. Showcase your portfolio’s performance using the full range of quantitative measurements. Institutional investors are more advanced than ever, so be prepared to offer them the data and analysis of their choice. The numbers themselves are critically important to an investor’s decision-making process, but so too is the fact that their managers are as diligent as they are at tracking, understanding and knowing what to do with those numbers. At a minimum, be able to provide the following:

• Risk (delta and beta, adjusted with implied volatilities)
• Daily exposure detail since inception
• Alpha over custom-blended benchmarks on your long and short positions
• Asset allocation versus stock selection criteria
• Concentration, liquidity and leverage statistics
• Volatility
• Attribution, both absolute and relative

3. Harmonize your team. If an investor speaks with four members of your team separately, how certain are you that all four members would articulate your fund’s compelling edge similarly? Conversely, if you were an investor and met with four members of an investment team and received four inconsistent explanations of the fund, would that make you more or less likely to invest? Define your key messages in short-form (less than 1 minute) and longer form (about 3 minutes), and then drill your team periodically to ensure everyone is in harmony.

4. Operate in a multi-prime and multi-custodian environment. The days when a fund larger than $75 million could use only one prime broker or custodian are over. Institutional investors require, for good reason, that managers mitigate their counterparty risk by using multiple primes and custodians. Further, some institutions choose the prime broker and require that a true custody bank retain at least a portion of the cash and fully-paid-for assets under management.

5. Accept separately managed accounts. The demand for separately managed accounts continues to grow, and institutions want assurance that fund managers are operationally equipped to handle these structures. Of key importance, you must be able to demonstrate that your managed accounts perform consistently with your flagship strategy.

6. Provide institutional quality infrastructure.“Institutional quality” means, quite simply, that regardless of the size of  your fund, it run in a manner that constantly adheres to all best practices. This includes having an empowered compliance consultant or internal CCO, retaining reputable third-party administrator and tax/audit firm, outsourcing your IT (complete with disaster recovery and multiple levels of redundancy) as well as defining and enforcing strong trading and operational policies and protocols.

7. Show sustainability with limited reliance on the founder or any single person. So often in asset management a “star” analyst, portfolio manager or trader becomes the face of a fund, a phenomenon that cuts both ways for funds. On the one hand, high-profile managers draw clients, but on the other hand institutions no longer accept “key man” risk. Showcase your players, but emphasize the team element.

8. Understand your shortcomings. Effective managers, no matter what business they are in, are keenly aware of their risks, shortcomings and exposures. When an institutional investor asks you this question – and they will ask it – they expect a response that demonstrates a full understanding of what those shortcomings are and how you control for them.

9. Know your competition. Understand that any institutional investor who is interested in your strategy has likely researched and talked to many of your competitors as well. Your competitors have explained why they are superior. You need to know – and articulate with multiple supporting facts – why you are the better choice, differentiated and truly unique.

Raising and retaining institutional capital without the ability to articulate and differentiate your business including all of the above makes is next to impossible. And the barrier is only going higher.

We welcome Hedge Connection associate Mike Lucia to the The Final Meeting.  Mike will be reporting on various capital raising headlines and informative articles scoured from industry news.

With my current role at Hedge Connection, I am always searching the internet for information about capital raising ideas for our hedge fund clients. I’m starting this monthly letter with the intention of helping managers stay on top of current news articles that feature marketing and capital raising information for their fund. Throughout the month, I will be collecting the best articles from different publications and posting them here. I welcome your comments and let me know if you come across a relevant capital raising article and I will post it.

5 Capital Raising Strategies For Hedge Funds And CTAs
This is a great article which features some very important tips for emerging managers looking to raise capital. I agree with the majority of what Kevin has to say and really enjoyed the paragraph about how important it is to emphasize what makes you different from the competition. Remember: you are competing with over 7,000 funds who employ the smartest minds in the world…what makes you stand out from the rest?

Marketing Your Hedge Fund – Communication Primer

Be sure to read the basic facts about any audience. These are great and pertain to any and all presentations you may give in your career. 1) No one wants to feel stupid; 2) Confidence, articulateness, and organization inspires trust; 3) If the audience cannot sense a connection at some level they are lost; and 4) Listening is the greatest skill of all. The author goes into greater detail on each one of these topics which prove helpful when pitching potential investors.

Recent Allocations

Who said investors aren’t allocating these days? It looks like there’s been some nice activity in recent months according to the articles below. From what I’ve seen and heard, the big guys are eating first (the largest funds will be closed by Q2) and the smaller funds will begin to see inflows shortly thereafter. For those of you who have been frustrated in your marketing efforts, keep in mind, many funds that have been closed for many years were suddenly open to investors over the last 24 months. “Opportunities of a lifetime” as one investor recently told me. Once these funds close, investors will have to put their money somewhere. I am a firm believer that you should always be in front of prospective investors so when the time is right for them to allocate, you are in the front of their minds. You can’t get hit if you’re not in the traffic.

FierceFinance: Hedge fun inflows pick up

BusinessWeek: Hedge-Fund Assets Rose by $4.6 Billion in December, Report Says

Opalesque: BarCap: Hedge funds see $150bn inflows in first nine months of 2009, mid-sized funds most attractive for investors

MarketWatch: Investors pour $14bln into industry in fourth quarter

Congratulations are in order for Finisterre Capital (Hedge Connection Club Hedge Member) who was just awarded a $250 Million allocation by the New York State Common Retirement Fund. Hard work on your marketing plan does pay off folks!! We wish Finisterre continued success.

I look forward to bringing you the next installment of Always be Marketing and don’t hesitate to contact me if you have any questions on the Hedge Connection platform.

Hedge Connection is very pleased to be a media partner for Precision IR’s Global Investor Day 2010.

The January 19th event will be in Virtual Trade Show format, with multiple sector tracks, exhibit halls, live web casts and a live “networking lounge”. This format provides several interaction opportunities with interested investors.

This one-day virtual conference will provide companies a unique platform to share strategies for 2010 and beyond. As part of this high-profile event, presenters will have the ability to discuss their company and the value it represents directly to investors. The event will be archived and available for investors to view for 3 months after the day of the event.

Precision IR has a database of over 1 million high net-worth investors whose average portfolio exceeds $600,000. To build event attendance Precision IR will leverage this database along with a robust and integrated marketing program including direct mail, email, interactive, PR, SEM and social media programs.

There are already over 3000 investors registered to view the event.

Global Investor Day 2010 is being promoted by some of the largest and most recognized names in the industry including Morningstar, J.P. Morgan and Edgar OnLine.

Presentation Package Available to Funds, CTA’s and RIA’s

Cost: $2,000

Package Includes:
* 30 Minute Track Presentation
* Branding on Track Player Console
* List of all Participant Attendee Contacts from presentation
* Virtual Exhibition Hall Booth

Download the brochure.

If you would like to be considered for a 30 minute presentation slot, contact Lisa Vioni.

There are several spots available and we would be happy to discuss the opportunity and any questions you may have.

Happy New Year!

If there is one thing I am sure about, it is that the hedge fund industry is not going away. That is clear.  Even with all of the problems this industry faced last year, hedge funds still outperformed long only funds and added the much-desired alpha to many portfolios. The best and the brightest will continue to grow and Darwinism will take those who have no place in this industry and burry them forever.

As all businesses should be doing at the beginning of the New Year, Hedge Connection is redefining who we are, what we do and how we can add value to our customers.  The areas where we think will affect our clients this year relate to compliance and new SEC regulations that will be imposed on the industry.  In light of this focus, we have proactively made strategic partnerships with two important compliance offerings that will help hedge funds deal with the new scrutiny that will be placed on them this year and going forward.

The first partnership is with Bowne, the oldest company on the NYSE. Hedge Connection will be marketing Bowne’s new secured delivery system called Privet.  Privet lets users track when documents are sent, when they are opened and who reviews them. This is a robust tool that will help with SEC audits as well as a great marketing tool that lets a marketing professional know exactly when and if a presentation was opened and viewed.

We have also have partnered with JG Advisors.  Judith Gross has created a software tool called PWG TechCheck.  PWG TechCheck is a scored self-assessment tool for asset managers based on the guidelines set forth in the Best Practices Report issued by the Asset Managers’ Committee to the President’s Working Group (PWG) on Financial Markets. PWG TechCheck also cross-references to the European Hedge Fund Standards Board (HFSB) best practices report and may allow you to sign on with confidence at the end of the assessment process. Complete PWG TechCheck and see clearly how your hedge fund group stacks up.  For a small user fee a fund can utilize this tool for 3 months and generate a PDF that shows results. This PDF can be used as a marketing piece and as a self-assessment and due diligence tool.

If you have interest in either compliance product, please contact us to receive Hedge Connection’s special partner rate code.

Hedge Connection has also redefined who we are. We are no longer simply a website that gives users access to online information. We are a full service turn-key marketing solution.  We offer packages to help create a robust marketing program that includes on line exposure and access to investors, access to live events and marketing consulting.  Please contact us if you are serious about augmenting your marketing program this year.

Stay tuned for the announcement of other strategic partnerships. We have some exciting things in the works and we look forward to continued success this year!

Join Andrew Saunders from Hedge Connection and representatives from Armored Wolf, Hovan Capital Management, Hadelrock Capital Management and Schulte Roth on Wednesday December 15, 2009 for a 90 minute webinar on the issues Emerging Managers face raising capital in 2010.

Further information and registration.

http://www.hedgeworld.com/webinars/

Friend of the firm Norman Chait, CFA from Nardis Advisors volunteered the attached post thought – and action- piece on the impact of UCITS III structures on hedge funds.

His advice?  if you have a liquid strategy and have European investors, be proactive an establish a UCITS III fund or your investors will vote with their feet you will be playing catch-up.

UCITs III for Non-Dummies

Below please find my latest interview for CAIA’s www.Allaboutalpha.com.  Enjoy, Andrew

____________________________

By: Andrew Saunders, AllAboutAlpha.com Editorial Board.

When launching a hedge fund, managers face an implicit conundrum – how do you raise money without a track record and how do you develop a track record without the money?

The increasingly acceptable approach is to accept seed capital – the venture capital component of the hedge fund universe. But that wasn’t always the case. Strong arguments were made for a selection bias in managers that opt for a seed investment, the argument ran something like, “if you’re that good, you won’t give away equity” approach. However the environment has changed. Recent research from Acceleration Capital Group offers some metrics around the trends.  To provide an informed view from the seeding perspective, we direct our 7 questions this month to Anthony Scaramucci, Managing Partner of SkyBridge Capital, to help us understand the current dynamics.

After graduating from Harvard Law School, Scaramucci started his investment career at Goldman Sachs, built a managed account business and started four hedge funds before selling the business to Neuberger Berman. Scaramucci launched SkyBridge Capital in 2005.

Q1: How would you describe the change in perception of the seeding industry from 2000 to now?

Earlier on, seeding was largely unknown and used as a one-off product.

It has taken time to educate the investor community on seeding, but now there is wide acceptance of the model and the perception has shifted from adverse selection to affirmative selection. Originally, it was perceived that no “good” manager would need to give up a fraction of his business to receive capital. However, markets have normalized and the hedge fund bubble has burst. There is a clear investor shift to affirmative selection, where talented managers view seeding as an endorsement of their skill as a manager and viability as a business. There are several economic factors that are lending to this shift:

• Migration of talent from larger hedge funds and major banks;
• A scarcity of capital has forced even the best/brightest new managers to have difficulty attracting capital.  (Approximately 70% of new capital flowed to the 100 largest hedge funds in 2008.);
• Distressed pricing in many asset classes and volatility makes this market the best opportunity to launch a hedge fund.  The lack of capital creates distressed pricing, which translates into buying opportunities for those contrarians that have capital to deploy.

Q2: In crafting a seed partnership, has the balance of power shifted from manager to investor? How have the agreements changed?

At the moment, the balance of power has shifted more toward the investor, and the best mechanism for capturing that is a seeder. A seeder aligns the interests of both parties. We have the ability to have transparency into the manager’s portfolio, dictate certain risk parameters and expedite capital withdrawals from the fund if the manager steps outside his initial agreed upon strategy and/or risk guidelines.

In general, with the scarcity of capital and the increase of talented mangers looking to launch their own hedge fund, the seeder definitely has the upper hand. With that being said our goal when partnering with a manager is to never suffocate him with onerous terms. We enter our seed deals to build long-term relationships rather than to take advantage of the moment.

The process of negotiating with managers has become much easier as the industry begins to professionalize and seeding becomes more mainstream. SkyBridge requires that its hedge fund partners adhere to specific risk parameters and provide full portfolio transparency. Managers are “pushing back” much less on the terms then in 2005-2007.

Q3: What are the challenges in establishing a seeding/incubation program?

Most people think that seeding is simply finding the right manager, conducting due diligence and providing capital to early or start-up hedge funds. People don’t recognize that there are two other vital aspects of the seeding model.

A seeding program must also assist and help new managers navigate the operational and strategic risks of running a new business. There are significant headwinds facing a manager as he scales his business, and seeders must be there to assist managers during their normal growing pains. I believe there isn’t a “one-size-fits-all” infrastructure template for each manager. We provide operational support to new managers, but we allow them to tailor their infrastructure specific to the needs of each manager’s team, strategy and investor requirements.

Another aspect of the seeding model that people often overlook is the ability to help the manager raise capital. It’s important to get managers to critical mass and we play an active roll in putting our managers in front of interested and relevant investors. SkyBridge’s success is largely attributable to our global network of investors who invest in new and emerging managers.

Q4: What are the biggest risks when building out a portfolio of underlying managers?

The greatest risk is the temptation to be short-sighted, and partner with a manager that has a “flavor of the month” strategy. When looking at potential managers, a seeder needs to identify a manager that is capable of building a successful business with a strategy that generates alpha regardless of where we are in the business cycle.

Q5: What types of investors seed investors directly or participate in dedicated seed funds?

The seeding model has gained mainstream acceptance. We are beyond the “early adoption” phase when only a few high-net-worth individuals and family offices were investing in the seeding space. These early adopters can be characterized as “opinion leaders”, forward thinkers who try new ideas, but do so carefully. That small group now has become a much larger group. We have transitioned to the “early majority” phase of recognition for the seeding model. There is now greater institutional/mainstream acceptance, which will only increase as investors realize the potential of new and start-up hedge funds.

There are numerous studies and ample evidence to show that early stage managers perform better than their larger, more mature peers. The reasoning behind the data is that new managers are hungrier to succeed and have a smaller asset base that enables them to get in and out of trades more easily, and find opportunities that larger funds would overlook. It’s difficult to identify new managers with limited resources, and there is significant risk in investing in one manager; a dedicated seed fund addresses those needs and provides a more diversified investment opportunity.

Q6: How successful has seed investment been to the growth of the overall HF industry? Do you have any sense of how the most “successful” managers have got their start? Was it on their own or through seed investment?

Some of the most successful, high-profile managers got their start with help from a seed investor:

• Citadel – Ken Griffin was seeded by Frank Meyer, founder of Glenwood Capital
• Och-Ziff – Daniel Och was seeded by the Ziff brothers
• Maverick Capital – Lee Ainslie was seeded by Sam Wyly
• GLG Partners – Noam Gottesman was seeded by Lehman Brothers
• Farallon Capital – Thomas Steyer was seeded by Warren Hellman of Hellman & Friedman

…and then there are the 38 “Tiger Seeds” seeded by Julian Robertson.

Q7: Can the industry continue to grow without the seed/incubation industry?

With the hedge fund bubble bursting, investors have become much more selective with their hedge fund investments. We are now in the era of Hedge Fund 2.0, which is about institutionalization, transparency, liquidity, professional investor relations and stringent risk limitations. It has become more much more expensive to run a hedge fund and investors are taking longer in their due diligence and writing smaller checks.  In this environment, most small managers find it exceedingly difficult to raise capital and are open to the seeding model.

Seeding is absolutely critical to the future growth of the industry. The old saying goes that the first $100 mln is the hardest. Only a seeder gives a manager 50% and then works hard to support the business and raise the other 50% so that managers can focus on the portfolio. Without this critical support, fewer managers would get to scale and the industry would not be ready for coming waves of institutional allocations.

We want a robust and diverse hedge fund industry and our goal is to raise overall awareness of small and emerging managers. To that goal, SkyBridge hosted its first SALT (SkyBridge Alternatives) Conference earlier this year bringing together investors, managers and service providers. The conference was a huge success, and we plan to make it an annual event to promote and help increase awareness of the hedge fund industry.

Notes from the most recent IMI Consultant Congress. Great speakers offering excellent insights.

Marketing strategies that stand out with consultants.

-       Quarterly report with investment commentary

-       1-2 pages on investment that were in place at beginning of the quarter and see how the ideas played out.

-       Overall idea – walk through what was the view, what was the expression of that view and how did it play out to show examples of execution of the strategy.

Client service structure second to none.

-       True differentiator is to have very qualified client service people that really understand the space. To retain highly qualified people have to pay them, but right now, most of the money goes to pm and sales.

Transparency of investment process

-       Keep it simple stupid.

-       Quant meltdown of 2007 – Conference calls meeting in person, share the analysis, sharing the research that was being done in the portfolio.

-       Tough time when clients are managing more and more transparency.

Not going to be the asset management firms with the best performance that is going to win. Looking for a full suite of services and high quality service.

There are about 25 clients per consultant.  More time or less time really understanding the money manager. Majority of inbound is inquiry specific, but on the product side.  How can you help me manage my portfolios better.

How to build value with consultants?

Build on first good meeting.

What is the business plan?

During the first meeting give a good basic overview of the firm. What is the growth strategies?

Then focus on one strategy.

-       What do you really believe. What are your true convictions?

Then talk about performance.

-       What type of environments you do well. What type of environments we don’t do well.

Position firm as a resource.

-       Provide research. Help educate us.

-       Market commentary would be helpful.

-       Consultants read whatever is sent – read their commentaries. GMO, Howard Marx at Oaktree – Pimco

Target consultants that fit your firm.

-       Understand the consultant philosophy

-       Recognize that the research group is where you begin– respect the analyst. Understanding the important people in the process is critical.

Getting consultants to pick your firm.

-       Final presentations –  Marketing, branding, differentiation,

-       Demonstrate sustainability

-       Justify the fees

Challenges when reviewing managers

-       time – have very little of it

-      Don’t waste time – make interaction efficient.

-       Determining key personnel

-       Onsite meeting – must have access to the entire team.

-       Good accurate performance attribution – what’s working well what’s not working well.

Attributes that we seek?

-       Conviction – stick to style when times are tough.

-       Consistency – performance, team members, etc.

-       Pragmatism – understand the niche

-       Investment culture – org structure, compensation culture.

-       Investment decisions ahead of business decisions.

-       Risk controls – passion con

Dos and don’ts

Don’t

- Don’t lead with performance

- Not hottest performers

- PM – do not discuss every holding

- Don’t rely on the past to explain the future. How are you going to sustain going forward.Do

Do:

Explain the investment process

Attention Fund Managers: The 2009 Investor Champagne Roundtable Series is your opportunity to meet eight qualified investors in a two hour roundtable session. Our next event is December 16th at the Terrace Club in New York with a view of the Rockefeller Tree – download your invitation.

Register Now! Limited space remaining.

Take control of your marketing program. In this challenging marketing environment, the Investor Champagne Roundtable series is the most efficient and effective marketing opportunity available.  The investor roundtable offers the unique opportunity for hedge fund managers to sit down face to face with 8 active hedge fund allocators.

Watch the video

What people are saying:

“That was the best cap-intro event that I have ever attended. I will attend every one this year.”

“So much better than large events where you don’t know who’s there or what they are looking for.”

“I planned my trip to New York around this event. I met existing investors in the morning and 8 new investors in the afternoon at your event. Thank you.”

Register Now!

Each hedge fund will have an opportunity to meet each investor during the two-hour roundtable session. Investors provide their background and offer insight into their investment process. Hedge funds seated at the table will introduce their strategy and an opportunity they see in their sector this year. The roundtable session concludes with a champagne reception.

Investors at our previous events have included:

UBS Hedge Funds Groups

AC Investment Management

EIM

Lighthouse Partners

Skybridge Capital

Tulane University

WR Capital Management

The Beryl Consulting Group

Generali US

Riverview Alternative Investment Advisors

Proctor Investment Managers

GFX

Larch Lane

Persistent Edge Management

Participating investors are selected at the discretion of Hedge Connection.

For more info, event dates and to register got to: www.hedgeconnection.com/roundtables

Further inquires can be directed to events@hedgeconnection.com

Hedge Connection Launches New Hedge Fund Membership Options

Hedge Connection launches three new membership packages including dedicated Emerging Manager Launch package. IMR events now integrated with Hedge Connection as HedgeEvents.

NEW YORK, November 18, 2009 – Hedge Connection Inc. (“Hedge Connection”), the hedge fund marketing and events platform, today announces the launch of three distinct marketing packages to help hedge fund members enhance their marketing effort.

The launch of the membership packages coincides with the redesign of the Hedge Connection website. The three membership options offer targeted, valuable marketing assistance to managers at all stages of their growth cycle. Hedge Connection operates as an independent consultant providing access to a series of powerful marketing platforms. The packages include:

* New Launch/ Emerging Manager Package, providing access to dedicated investors in early stage managers, access to events and a suite of marketing services;

* Executive Membership Package, offering access to investor members, unlimited access to Hedge Connection’s independent cap-intro events and customized marketing assistance on the platform.

* Free Posting Member, offering exposure to all Hedge Connection investor members and preferred access to all Hedge Connection events.

Ms. Lisa Vioni, President and CEO of Hedge Connection commented, “Only Hedge Connection offers integrated packages and the tools that funds need to be successful. While the investment environment is beginning to thaw, it still remains extremely difficult to raise capital. We caution managers against providers that offer “silver bullet” solutions. There is no such thing. Hedge Connection has a sterling industry reputation and offers proven marketing counsel and access to a network of active investors that can help you build your hedge fund business.”

The Hedge Connection marketing platforms include:

* Web-based network of qualified, opt-in investors and hedge fund managers

* High-quality, engaging independent “Cap-Intro” events

* Marketing consulting and brand-building services

To learn more and/or register for an upcoming event: http://www.hedgeconnection.com.

About Hedge Connection:

Hedge Connection has been helping managers and investors through web-based research, events and advisory work since 2005. Hedge Connection is the first and only internet-based platform that offers hedge funds direct access to a membership of “opt-in” qualified active hedge fund allocators.  Investor members join for free and gain access to detailed information on hedge fund members.  All members receive invitations to member’s only events and partner discounts.  Learn more and Join the Club at http://www.hedgeconnection.com.

Media Inquiries:

Andrew Saunders

Managing Director

Hedge Connection

(212) 537-6152  ext. 302

asaunders@hedgeconnection.com