As summer officially ends and one is reminded of fall activity, winter, and even the dreaded snow of the future, we are reminded of the connection between the enjoyable summer vacation and business. When flying, one often encounters the “hurry up and wait” syndrome; passengers rush into the airport, through security, past the gate, and end up in a snail-paced queue onto the plane.
Returning from a restful vacation offers an opportunity to examine the investment business, and to ensure that our firms don’t operate like the aforementioned boarding lines. During the past few years, firms have been too slow to act because of the financial crisis, due to the fear and uncertainty created. Now that we are almost 2 years past the crisis, it is time to take advantage of the end of the summer and move forward. Fall is an ideal time to evaluate a firm’s strengths and unique advantages along with goals, to determine what actions are essential for success. In order to thrive, an investment firm needs to make true investments of its own—not just in securities for its clients—but in growing the business. Planning is essential, but equally important is taking action, whether in hiring staff, or making lift-outs and acquisitions. There is no time like autumn, with the thoughts of crisp air, to plan to succeed, and to succeed by moving forward.
September 3rd, 2010
While a number of large established hedge funds have recovered quite well from the financial crisis, many small funds have continued to struggle. We anticipated this development in the new normal environment where competition is greater and margins are tighter. In such an environment, there is greater differentiation between the strong firms and weak ones; weak firms will have trouble surviving.
As we speak to small hedge funds, we notice a common theme; many are having a hard time understanding why their marketing has been unsuccessful lately since it was so successful when they started a few years ago. Many of these firms are very sophisticated investors, but are quite naive when it comes to marketing. Just a few years ago, they were able to attract clients fairly easily, often without a marketing function at all. If they had marketing resources, they were usually limited to an unsophisticated sales person who simply called potential investors, or they relied on prime brokers for introductions.
In the current environment, hedge funds are being forced to run as businesses, with proper infrastructure and strategic marketing in order to remain competitive. Many hedge fund managers have never had to understand strategic marketing as the business was easy in the past. Now, not only is the business more competitive, but the entire investment industry is converging such that hedge funds and traditional managers look more and more alike. Their products and business structures are converging. In a few years, there is likely to be little distinction between “alternative” firms and “traditional” firms. The sooner the hedge funds understand this, the sooner they will get their businesses on track for the future.
July 21st, 2010
Over several years, we have provided service for, and have been affiliated with, a number of large financial service organizations who have formed their own asset management units. The appeal of asset management is quite obvious: recurrent revenue and generous profit margins. Despite the effects of the financial crisis which will continue to put pressure on these businesses, well run asset managers should continue to thrive.
When set up properly, asset management groups within large organizations can operate quite independently of their parent, yet draw on its vast resources. If they can establish the entrepreneurial culture necessary to be successful in the business, they can also serve as a model for other businesses within the greater organization. In order to do so, there must be separate leadership, infrastructure, and compensation incentives which are aligned with the goals and progress of the asset management effort.
In the best situations, this “intra-preneurial” spirit can not only drive the success of the asset management business, but provide an example of best practices for the rest of the organization.
July 7th, 2010
The often active discussion around how to best compensate institutional asset management salespeople seems to have heated up even more recently, based on conversations we’ve had with managers and executive recruiters. Coming out of the crisis there is a keen focus on business growth. Managers have a sense of urgency around sales, and therefore want to compensate individuals heavily on near term sales.
While it is understandable that managers want to get their client growth back on track, it is always important to balance that need with sustainable longer term growth activity. Also, compensation systems for salespeople are not as simple as determining whether they should be commission based or objectives based. Many factors must be considered to properly balance short and long term goals. These include firm size and maturity, product menu, and the size, breadth and depth of the sales organization.
June 16th, 2010
In the past we have written about the new normal economy, a new reality which will present many challenges to success and profitability. This environment is like the aftermath of a major earthquake where there are a series of aftershocks. The events of the past weeks in Europe are good examples of these aftershocks. Until the world effectively de-leverages, the aftershocks will continue in varying intensity.
In our view, asset managers have begun to adjust to this new reality. Although they are still cautious about the environment, as they should be, they are making decisions and moving their businesses forward. This is a healthy sign. They are not as frightened by these events as they were during the most intense period of the financial crisis. They seem to be looking soberly at the situation before them and trying to make thoughtful intelligent decisions.
The best managers realize that this will be a time when strategic decision making, effective execution of those decisions, and persistence will pay off. They should keep their antenna up for the next aftershock, but stay the course.
May 23rd, 2010
As 2010 gets underway, broad trends toward outsourcing of a variety of services and functions continue. For the foreseeable future, we will be in an era where efficiency and tight execution predominates. Those firms that constantly examine their cost structure and optimize value per dollar spent have the best chance of being winners.
We have written before about the opportunity to outsource various marketing support functions to gain efficiency. There are variable cost solutions in the marketplace for marketing communications, RFP production, and data base management that offer low cost high quality services.
Another example of this trend applied more broadly is exhibited in the insurance asset management marketplace. Insurers are outsourcing asset management in ever greater numbers. It seems they have concluded that their core competency is in insuring risk rather than manages investments. A number of asset managers have noticed this trend, and alertly have started to explore their opportunities in this space. Of course, managing assets for insurers requires specialized capabilities so it behooves them to carefully analyze their potential positioning in the insurance segment before jumping in with both feet.
Overall, firms should continue to look for ways to streamline their operations and narrow their focus. Outsourced resources provide interesting solutions to certain functional areas. Look for this trend to gather momentum in the months to come.
January 18th, 2010
There has been much talk lately of “convergence” in asset management. That is, are alternative and traditional asset management styles and products converging so that there will no longer be much distinction between the two? Some years ago DE Shaw launched 130/30 strategies which are hybrids between the two forms of management. Recently Citadel announced they were launching a traditional fixed income business. There are rumors of other alternative managers launching traditional businesses. Certainly, over the past several years, many traditional managers launched alternative products, although in most cases they were sidelights to their main businesses.
In my view, distinctions between alternative and traditional forms of investment management have always been somewhat artificial. Certain strategies and products have blurred the lines for years. At the end of the day successful investment management strategies need to add economic value to clients and meet the objectives clients set out for those strategies within the context of their overall portfolios. Labeling the strategies alternative or traditional adds little to the understanding of whether they add such value and are proper fits.
Clearly, there are cultural and language differences between firms that have their roots in the traditional vs alternatives sides of the business. But those are inwardly focused dimensions. In order to succeed and prosper in the current environment, asset managers must, more than ever, keenly focus on client needs and respond to them with solutions-based strategies. In their words and actions they must put the client first, which might require massive cultural changes for some managers. In the end, though, we are all in business only to serve our clients.
January 11th, 2010
On the first business day of the year, we are all hopeful and optimistic for a successful and prosperous year, especially after the difficult environment we’ve recently experienced. However, while we may yearn for the easier environment we previously enjoyed, it is more likely that we will settle into a new normal environment, characterized by increased competition and thinner margins.
In some sense, this seems right, since the asset management industry enjoyed out-sized margins for many years. But it will require sharpened skill sets and new tactics. Resources will need to be deployed efficiently, minimizing waste. All logical alternatives for accomplishing tasks and executing functions should be considered, such as appropriate outsourcing. Strategies must be focused, based on careful planning, and executed crisply.
We all hope this year will bring an easier operating environment. But we must be prepared for continued challenges to come.
January 4th, 2010
While there are some nascent signs of recovery, and the markets like to climb the proverbial wall of worry, every day seems to bring more news of headwinds to the economy. Some of the headwinds are current events like debt problems in Dubai followed by financial problems within the EU. Some are longer term changes in attitude such as the well documented increase in savings by consumers which is likely to last longer than the immediate economic downturn. While this is healthy longer term, it does not help support the near term recovery. Overall, rather than solving for the debt overhang, the government seems to be adding to it.
These factors all fit within the typical scenario for credit induced downturns which tend to be much more difficult to recover from than cyclical downturns. This “new normal” environment will require management to follow careful and thoughtful strategies, and executive crisply and flawlessly. Executives will need to be on the top of their game. However, those that differentiate themselves from the pack could enjoy excellent success.
Dorothy, we are not yet out of the poppy fields. Let it snow, let it snow, let it snow!
December 17th, 2009
In the post-financial crisis world, there are a lot of questions swirling around regarding the demand for hedge funds and what their proper allocation should/will be within investment portfolios. Will the prior trends toward wider acceptance resume, or will they be curtailed by residual fears of loss and mismanagement?
I believe that the hedge fund world will be broken down much more specifically by strategy. It has been recognized by many for some time that there has been an artificial separation between “traditional” and “alternative” investment strategies. The alternative bucket has encompassed all types of disparate investment strategies. Going forward, analysts, investors, and plan sponsors should and will continue to incorporate a variety of strategies into portfolio structures based on the risk and return characteristics of each strategy rather than an artificial label.
The more important separation, which will become more prominent, will be between alpha and beta, where strategies that generate true alpha will continue to be rewarded, while more beta oriented strategies will be marginalized to compete with the growing array of passive alternatives. In addition, within the hedge fund arena, greater scrutiny will be placed on transparency and the need for managers to operate like their traditional counterparts, increasing their need for operational infrastructure, compliance support, and other mainstream business functions. As these resources are built, hedge funds will become more and more mainstream investment alternatives, led by those that are most easily understood and transparent. By strategy, long/short equity appears to be a prime candidate; indeed it seems that such strategies are already growing institutionally.
December 10th, 2009
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