News & Press: Updates

CalALTs' Hedge Fund SIG Hosts "Lessons Learned in Capital Raising & Allocating"

Tuesday, September 15, 2020  
Posted by: CalALTs
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"The webinar was insightful and the panelists touched upon many crucial ideas."

~ Webinar Attendee*

 

"Great call today. I really enjoyed it."

~ Webinar Attendee *

 

"It was great! I look forward to staying in touch and attending additional upcoming meetings."

~ Webinar Attendee*

 

*All quotes are taken from our Post-Webinar Attendee Survey.

 

On Thursday, September 10th, CalALTs Board members’ Vincent Calcagno and Jason Gerlach were joined by Michael Marcus, Partner & Head of Manager Research for Prelude Capital, and Greg Moroney, Principal & Operational Due Diligence Analyst with ABS Investment Management LLC to discuss the changes they’ve seen with regard to how they do business and create capital in today’s changing environment. The panel explored new virtual visits versus traditional onsite meetings, how they manage a remote team, updates to operational due diligence that allocators have to be aware of, and anecdotes about their own interesting experiences during the past 6 months.
 
Key takeaways from their comprehensive discussion include:

  • Hedge fund’s showed resiliency in performance as well as operationally in dealing with the virus and related market impact. The inability of fund personnel and counter-parties to access offices across the country was essentially a non-event due to the strides made the last few years in technology.  Surprisingly severe storms like the one that hit the Northeast last month proved more problematic due to downed power lines and multiple communication firms failing to maintain connectivity.

  • Asset allocators are becoming increasingly comfortable with undertaking a lot of their qualitative and operational due diligence remotely using tools such as Zoom and various cloud-based document repositories such as Citrix ShareFile, Box.com, Dropbox, Teams and others.  Managers seeking allocations should become comfortable with these tools and have all of the documents that an allocator requests prepared, organized and ready to reference and share prior to any due diligence meeting.  As was noted on the panel, "a manager shouldn’t get on a call or video conference with me unless that manager knows his/her stuff."
  • There remains a thirst for asset managers who can present a differentiated investment process that delivers truly unique and complementary return outcomes. In other words, allocators are rarely looking for managers who are able to generate returns using widely traded stocks but instead, seek managers who are able to trade less-frequently traded stocks or other instruments and doing so in a way that generates a return profile that looks materially different than a return stream that can be achieved from buying and holding a basket of widely traded stocks. Managers should not just be prepared to explain and demonstrate that their investment strategy is unique, but also be able to demonstrate how it’s replicable and likely to generate a return stream that the allocator’s other managers are not likely to be able achieve.

  • While very large asset management firms continue to retain many advantages in the allocation game such as having more robust operational infrastructures and generally being viewed as “safer” bets by many allocators, there is room for smaller and emerging managers to gain a foothold if they are prepared for the rigors of the due diligence process and armed with a compelling story. Namely, managers should be prepared to explain and demonstrate why their business, despite being of a smaller size, is aligned with the right service providers such that it can safely take on and manage new allocations and comply with all relevant regulatory requirements. Moreover, managers should present their investment thesis and processes in a way that will show that what they are doing is perhaps something that, due to their scale and lack of nimbleness, large asset managers are not able to replicate.
  • The traditional 2% management fee/20% performance fee model that dominated the hedge fund space for many years is, with a few notable exceptions, “dead.”  In other words, thanks to challenged returns in recent years for the average hedge fund and thanks to intense competition among many mangers for a reduced flow of assets, very few allocators are now willing to pay managers at a 2 and 20 level, particularly newer managers who have not yet proven the robustness of their investment strategy and smaller managers that don’t have sufficiently scaled operational expenses to justify fees at the 2 and 20 level. Accordingly, it is imperative that early stage and smaller managers be prepared for more flexible terms related to their pricing structures if they want to gain market traction. Click here for reference
  • Of particular concern for everyone was the unintended consequences related to individuals working from home for extended periods of time thus having the lines blurred even further between work and personal time.  Company culture, hiring, training, teaming and mental well-being of colleagues were all mentioned as areas for further analysis and focus.

 

If you didn't make this Hedge Fund Special Interest Group (SIG) event, please check the CalALTs calendar for details about future events.



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