The following article appeared on FINalternatives.com on April 23, 2015. It is written by Brian Macallister, managing director, Ledgex Systems.
Today’s hedge fund investors are more competitive – and more demanding –than ever. As a result, many hedge funds are walking a fine line. They need to track communications, client relationships and capital movements in order to raise and retain assets, while providing exceptional client service and exceeding reporting requirements – all without increasing headcount or operational overhead. That balancing act is essential to avoiding these three primary reasons investors walk away from their hedge funds:
1. They aren’t happy with performance.
No amount of communication or reporting will save an underperforming hedge fund from losing investors. However, those efforts will help fund managers get ahead of investor concerns and proactively address likely questions during periodic performance dips. Information is power, especially in the hands of the firm. When information about how the investor’s balance today relates to past performance is readily available and integrated with customer relationship management data, financial firms can better manage expectations and investor reactions.
2.The relationship between the firm and the investor is weak.
Institutions and high net worth investors do business with people and companies they trust. Creating connections based on trust requires consistent nurturing and visibility into the entire investor relationship – not just a list of contacts and touches. Unlike in other industries where standard customer relationship management (CRM) solutions can deliver reports based mainly on historical interactions, hedge funds, fund of funds, family offices and other financial institutions need the capability to layer typical CRM data on top of investor relationship data.
It’s just as important, for example, to know the history of the investor’s portfolio, the reporting documents the investor has received and the related capital activity as it is to know when the firm last spoke with the client and what other investments that person has made in the past. Can the firm accelerate reporting? Enable and inform sales and marketing efforts? Provide compliance support? The answers to all of these questions influence the strength of investor relationships.
3. There is a lack of communication and transparency.
Often, firms rely on several different tools, loosely cobbled together, for producing investor statements, mailings, K1s, flash returns and other key communications. Those tools might include Excel, rudimentary CRM systems, mail merge programs and crude workarounds. The disparate nature of these tools can cause serious communication lapses when it becomes difficult for a fund manager to see, for example, that investor A wants hard copy documents delivered to his vacation home in Florida October through May, and investor B spends a month skiing in Colorado every winter, where he also expects to receive mailings without interruption. Tracking these kinds of preferences manually is no easy task. Firms have to solve this delivery mechanism problem if they are to avoid losing investors over a perceived lack of communication.
This challenge is amplified by the fact that the 2008 recession changed investor demands regarding transparency. Quarterly portfolio reporting is no longer acceptable to investors. In some cases, investors want 10 times the reporting they expected before 2008, and it has now become the norm for these clients to demand separately managed accounts rather than pooled vehicles. Failure to meet those expectations is one of the primary reasons why investors drop their funds.
Retaining investors over the long term
Alternative investment managers face a real challenge in retaining wary clients who are quick to jump funds when performance, relationships or communication become unsatisfactory. This is the reality across firms. Smaller firms have fewer variables to juggle but also fewer resources for improving manual or unsophisticated processes, and larger institutions have more complex needs and challenges, which are also more complicated to solve. At both ends of the spectrum and everywhere in between, hedge fund managers need to be able to report information to investors in a repeatable, automated and tailored manner.
Investor communication is integral to hedge fund viability. In order to appropriately target, retain and upsell investors, firms need insights into each investor’s history and expectations. That information has to be closely aligned with capital movements, as well. With all of that data streamlined in one resource, hedge funds can more efficiently address mandates for accountability, transparency and reporting, and avoid the top triggers for investor flight.
Brian Macallister is managing director for Ledgex Systems. He has been designing and working with financial services applications for 20 years. Brian is the principal architect and product visionary of the Ledgex platform, and he is responsible for leading the company’s engineering, support and client service teams. Prior to Ledgex Systems, Brian was a director within the Eze Castle Integration Professional Services Group where he led large-scale custom application development projects for some of the largest hedge funds and fund of funds in the country. Brian has also worked with top industry firms including Charles River Development, Thomson Reuters and Fidelity Investments.