For the most part, hedge fund managers gauge success by numbers and performance, but hedge fund investors can’t and don’t want to have personal relationships with digits and spreadsheets. Maintaining physical assets is all and good, but according to a study by Chestnut Advisory, it is secondary to investor consideration.
“Assets flow best when investors trust the asset manager. Investor relations builds that trust via investor education. The traditional relationship-based sale is no longer effective. Investors today need to understand exactly what their asset manager is doing with their money, and why. In Chestnut’s proprietary survey of institutional investors, conducted for us by Rivel Research, the top factors driving investors’ decision to hire an asset manager are heavily influenced by effective IR education.”
Fund managers’ fixation on the wrong marketing tactic to attract investors is causing a rift in customer retention. This is not to say that the decrease in popularity and performance of hedge funds aren’t partly due to a volatile market and high fees. But the years of lack of communication and transparency has taken a toll on their bottom line. Small and medium sized funds will be impacted the most as investors are leaving for Exchange-traded Fund (ETFs – an investment fund traded on stock exchanges) and closed-end funds that offer immediate liquidity for small and medium sized investors.
If upon reading this, hedge fund managers scramble to communicate more frequently and authentically, it would still be a slow if not impossible recovery. Finally, after 30 years, hedge fund managers are feeling the pinch of a tight-lipped approach to keeping and gaining investors. Ultimately, what’s been lacking in the relationship between fund managers and their investors is the narrative of motive: why, what, how come, and who? In other words: why should I invest with you and why should I stay? Fund managers have been mum when the answers is negative and effusive when the answers are positive. The weight of the discrepancy is not lost on anyone and has diminished investor loyalty leading to the current sad state of affairs for hedge funds.
Adds the Chestnuts Advisory report:
“Today, asset managers must educate investors deeply about their products and every key aspect of their own company to gain trust and build a strong brand. Our research shows that assets flow only when investors trust the asset manager.”
The concept of transparency versus murky business practices expands beyond fund management relationships. Putting the customer first was addressed as far back as 1776 when moral philosopher and economist Adam Smith wrote Wealth of Nations. In order for hedge funds to regain ground in a volatile market, they’ll have to take a lesson from basic history which is a long time coming.