The Case for Allocator Education

Investor education is subtle. It’s no news for any manager of manager raising that different prospective clients have different needs. Levels of knowledge, too. It’s also no news that institutions have much greater knowledge of investment strategies and techniques, and that there has been a definite trend towards institutionalization of investors in hedge funds and other asset management vehicles.

This being said, having a proper mix of different clients is good for multiple purposes (among them, preventing a run for the exits by investors of the same type — and possible subsequent liquidation — in case of a redemption). How do you properly articulate the investment process to private investors that usually don’t have as much knowledge and sophistication as institutions?

Two Different Worlds

One of the first things I work on with money managers doing fund marketing and having allocator meetings is to always have two versions of their presentation. The structure of fund marketing materials is usually well-known (executive summary to start off the relationship, then a 20–30 slide presentation clearly articulating investment process, philosophy, team expertise and other factors).

Now the key here is: you create two versions of that presentation. One for institutional investors where you can go wild on the specific details — which they will not just love, but require — and another for private investors, that doesn’t go as deep, which would cause paralysis by analysis for this type of investor, but instead with a bird’s-eye-view of the process, and in many cases even educating them on investment processes and tools they might not be aware of and need to understand (most of the time, it’s derivatives).

The goal, then, is two have an “educating” version of the presentation for private prospective clients that educates them on investment processes and tools, and a “deep” one where you excruciatingly detail everything for prospective institutional clients that are used to the terms and want to vet the process further.

Investor Education on My Mind

Of course, all of this starts with the money manager recognizing the need for educating clients. This comes down to the essential conflict (or synergy) between the functions of a CEO/CIO, and how many CIOs have an investment background but not enough people skills, but at the end of the day, you have to see fund marketing as a required part of the job — and you have to see educating allocators that need it as a required part of fund marketing.

There’s also a cultural element here: investor education is not something that is tackled directly in many platforms. Dumb money exists, and investors have a right to be uneducated. The money manager that wants to effectively raise capital must

Build the Compendium

Your fund marketing materials will be iterative materials in the first place (due to aspects like needing to include the most recent quarterly performance numbers), but even if they weren’t, investor education for prospective allocators would force this.

As you meet with various prospective private clients, you will come across different doubts, different topics they need you to tackle. You will change your slides frequently, and possibly end up creating altogether different presentations just about the basics of certain investment techniques and asset classes.

Don’t Forget the Foundations

Of course, all of this has to obey the basics of raising capital from allocators. While education is important, it’s a cog in a bigger capital raising machine. The basics themselves can fill another article — or even a book at that — but in summary:

• The clarity with which you articulate the investment process is usually how an allocator measures the quality of the actual process. If your process is not that good but you articulate it clearly, you have one up over a manager that has a great process but can’t explain it clearly;
• Play the long-term game (expect 3–6m before “closing” a private allocator and maybe 9–12m to “close” an institutional one — this may be even longer). Try and push too hard in a short-term and not only will you not get the money, your fund might be flagged by the allocator as having something wrong in the background (why are they desperate for my money?);
• Provide transparency. Quarterly third-party audits are required by most investors, and managers that provide them before they are even asked gain an edge here;
• Don’t massage the numbers. This merits repeating, by many managers still don’t get the message. Don’t pretend to be smarter than allocators. Don’t lie about your down months, don’t hide down months, don’t transform the data in any way. Provide it to allocators and let the chips fall where they may. You might not get an allocation if your performance is not in the top tier — but you will certain not get one if you are shown as hiding something as well, and in the latter case you can lose the allocator forever — and those they talk to as well;
• Assume due diligence will be ongoing. If your fund was good enough to obtain an allocation, congratulations, but the journey continues here. Many managers don’t analyze the consequences of the actual allocation. Are you already fully invested in the first place? Can your current strategies and liquid assets take more money at this stage? How will the investment strategy change with more capital? Does the allocator know this?

Conclusion: Towards Allocator Education

A manager of money that wants to effectively raise assets from prospective private clients must take responsibility for educating them and realizing their knowledge and the level of detail asked will not be the same type as the ones required by prospective institutional clients.

The effective manager should understand investor education, historically, has not really been a priority for many HWNIs and/or family office owners, and therefore should have the capability to educate them on specific investment tools/asset classes when necessary.

A good way to do this is with an alternative version of their presentation in terms of marketing their fund, and slowly building a compendium of the most required explanations in order to build a solid and versatile knowledge base for handling prospective allocator requests.