“We’re the largest private recipient of IPO syndicate in our region.” This was from a manager who has great relationships with major banks in his region and pretty much just flips IPOs for fairly absurd returns. This is entirely a relationship edge.
“We are the only high frequency traders in our segment of the market.” From a HFT firm that implemented such high technological barriers to entry that they were basically a legalized front-running operation for a significant piece of the commodity market.
“We specialize in fraud activism– shorting and exposing fraudulent securities. To date we’ve exposed over 40 securities (97%+ hit rate) that have gone to zero, typically within six months to a year of the release of our research.” The firm found a region rife with fraud and exposed the bogus companies one by one, buying puts and shorting them the whole way down. Their edge was that the release of their research would often move the stock 50%+ over the course of a day or week. To some extent David Einhorn, Bill Ackman and other activist investors do this when they announce high conviction shorts or longs, (but their impact is usually less because they trade in large caps whose value isn’t usually an obvious zero.)
“Our strategy is pure arbitrage. We’ve never had a down week in our 7 year history.” This was from a manager that specialized in matched book securities lending. The strategy was to arbitrage the spread between different bank’s short interest lending rates.
“Our strategy is to basically buy cash at a discount of at least 15%-20%.” This was from a manager that specializes in trade claims of bankrupt companies. Trade claims are a non-publicly traded debt instrument that can often be sourced at a significant discount to the cash holdings of bankrupt companies in liquidation.
“For our fund to perform poorly enough to break even we would have to see consumer default rates climb above 18.5%, a rate that hasn’t been seen in recorded history.” This was from a P2P lending fund that also hasn’t seen a monthly loss to date (albeit over a shorter time-frame).
Some funds that wouldn’t take too kindly to even a cursory explanation of their strategy for obvious reasons.
I realize this may not be helpful to some managers since these are ‘niche-oriented’ strategies which are highly differentiated. For more generic strategies like long/short equity and global macro, I’ve seen two marketing approaches that are highly effective:
1. Tell Your Story
Don’t just walk investors through your pitchbook. (I know– you spent weeks on your pitchbook. I hate to be the one to break this to you but it is almost certainly very similar to the other pitchbooks they’ve seen recently.)
People are drawn to stories. The best pitches I’ve heard are stories of a person’s life where they’ve experienced trials and tribulations and learned valuable investing and human lessons along the way. Some may talk about the moment of clarity they had in college or from traveling overseas. Others will talk about a tough personal dilemma that taught a valuable lesson about investing or running a business. Investors allocate to managers that they trust both professionally and personally. Managers need to demonstrate both to earn an allocation. Tell a story that shows how you developed your competency, your investment philosophy, and your personal principles.
2. Mirror the Investor
Find out their personal investment philosophy, or at the very least how the investor made his/her money and relate it to your investment process. If the investor was an entrepreneur, ask how they were successful at building their business. Then talk about the elements of your hedge fund that are similar to such a business and how you apply a similar process for generating success. If they made money in real estate, explain your strategy as if each stock was a commercial property, and what characteristics you look for. The bottom line is you need to identify with the investor and their view of investing rather than just jamming your approach into their face and hoping they agree with it (which is what 90%+ of all pitches end up doing).
Please let us know if you found this helpful and if you have any questions!