10 www.hfmanager.com

When starting a hedge fund, attractingcapital is perhaps the most important

task a manager faces. Many hedge fundstendtostartoutinvestingtheirowncashandthatoffriendsandfamily.However,oncethehedgefundgrows,amanagerneedstoreachawiderpoolofinvestors.

Hedge Fund Manager draws on LisaVioni’s 11 years’ financial experience.In July this year she launched aninvestor-intro website, HedgeConnec-tion.com (see this page), which is set torevolutionise the way hedge funds raisemoney and attract investors (see box onthispage).

According to Vioni, the most importantobjective when starting a hedge fund is to

raise capital. It is critical the managerunderstands the financial as well as thepsychological commitment required tosucceed in raising money in the hedgefund industry. It is psychological becausethe sales cycle is long and can be frustrat-ing. You must not lose focus on doingsomething every week to increase in-vestor knowledge of your fund with theaim of raising money.

“It is important for a start-up to recognise raising capital can be a longprocess that doesn’t happen overnight,”Vioni says.

“Investors are going to be cautiousand will take between three months anda year to survey a manager before making their first investment.”

The first investment an investormakes into a new hedge fund is alwaysgoing to be smaller than a hedge fundwould hope.

Understanding the processRaising capital is a multi-level process, thefirst step of which is establishing a relation-ship and meeting the investor.

Vioni says: “A start-up fund needs tostudy the investor’s profile provided onHedge Connection and initiate the relation-ship by sending a virtual business card.You’ve made your first contact by makingthem aware of your fund. The hedge fundshould then follow up with a phone call andset a time to meet in person. This relation-ship may then continue to build graduallyover the course of many years.”

Vioni stresses it is vital to follow up the

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Raising capital

Lisa Vioni launched the first to-market investor-introwebsite HedgeConnection.com with Rob Arthurs. Aninteractive marketing tool, it allows managers to accessqualified investor profiles for the purpose of raising capital

How Hedge Connection worksInvestor-intro website Hedge Connection is set to revolutionise theway hedge funds find investors. The site offers hedge funds directcontact with qualified investors for an annual subscription fee, sothere are no back-end commissions or other fees applied to moneyraised or investors sourced. The benefits of using Hedge Connection include: ■ Economically viable. You will not have to commit to a third-party

marketer who might charge as much as 20% of your fee on moneyraised, in perpetuity

■ Marketing tool. You are guaranteed to meet between 36 and 240investors over the course of the year depending on your servicelevel

■ Immediate access to investor community without having to spendthousands of dollars going to conferences and lunches

■ Ability to make educated calls to the investor as you can gatherinformation from the investor profile on the website

■ Instant gratification. You can send virtual business cards and don’thave to sit and wait until the investor contacts you.

initial contact with a phone call. At thisstage you must ensure you are aggressivein convincing the investor to allow you tosend them your monthly numbers and/orquarterly newsletter.

“It is critical you send an update so aninvestor is aware of your performance fig-ures and your fund’s progress,” she says.

Then the waiting game begins. You allowthe investor to watch you for two or threemonths, and once you are satisfied theyhave seen you in optimal action it is timeto call again to request a meeting.

Typically, investors meet with a manag-er at least two or three times before theymake a decision to invest. The first meet-ing could take place over the phone, thesecond at the investor’s office, but most ofthe time the investor will need to visit ahedge fund’s office before they invest tosee the operation firsthand.

A beautiful relationshipA new hedge fund needs to be prepared,not only mentally but financially, for theamount of time it will take to build a relationship with an investor before theycommit.

Vioni believes many new hedge funds donot initially realise how important build-ing a relationship with an investor is. For

the investor, the relationship is often themost important aspect of the decision.

Vioni says: “The investor is not just in-vesting in a pure strategy, and although itmay sound like a cliché, they are investingin the manager. The relationship is vital,the investor needs to know and trust youin a different light than simply perfor-mance numbers. They need to trust the in-tegrity of the manager as well as theinvestment strategy.”

Who should you target?Not every start-up manager is ready tomarket their hedge fund. Often investors

will have a prerequisite of a two-yeartrack record from a fund. A smaller hedgefund with around US$10m under manage-ment will probably have the best returnon its marketing effort from family offices,high-net worth individuals and then theseed providers.

Regarding seed companies, some hedgefunds believe they are an attractiveprospect and others are more reluctant be-cause they usually have to give up a per-centage of the management company for a certain number of years. Some seedproviders, for example, will invest US$25min your fund in return for between 20% and50% of your management company for sev-eral years. This could be as few as fiveyears and as long in perpetuity.

Some hedge funds find the seedprovider model too expensive, but as astart-up you need to weigh up the prosand cons, because it can be difficult to ob-tain that first US$25m. And if the hedgefund has been operating for two years andis only at US$10m, it might make sense toconsider a seed company.

In fact there are benefits in using alarge seed capital group such as JPMor-gan Incubator Strategies. It may seemexpensive on the surface, but being affil-iated with JPMorgan’s group can beworth it in the long run because it has

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“A new hedge fundneeds to be prepared,not only mentally butfinancially for the time it will take to build a relationship with aninvestor before they will commit”

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How to 2006

enormous resources and relationshipsaround the world.

Importance of marketingAs traders, one vital aspect hedge fundsdo not focus on enough is their marketing.Start-ups often do not have an appointeddedicated marketing person, so the re-sponsibility tends to fall to the portfoliomanagers.

Vioni advises they need to take sometime to consider a targeted plan of action

over the first year to market their hedgefund. “Have a budget in mind and thenspend that money thoughtfully. Remem-ber to take into consideration the returnon money spent versus the number of in-vestors you are guaranteed to meet.”

Marketing is and should be conductedas a multi-level process. It should startwith a press release to all the importanthedge fund magazines, the development ofa quarterly newsletter, possibly a websiteand attending one or two targeted confer-ences over the course of the year. In addition, she advises it is beneficial to jointhe site in order to gain access to qualifiedinvestors.

Hedge Connection is the only availabledirect access to qualified investors thatdoes not require paying large back-endfees on money raised. It is therefore ex-tremely economical. The return on in-vestors met and potential future revenuesfrom investments is tremendous for theamount of money it costs to join. HedgeConnection offers the biggest bang foryour marketing dollars in terms of in-vestors you will meet.

Networking is also a vital part of the

marketing process. Vioni suggests, as astart-up fund, you should liaise with allyour colleagues and friends within the fi-nancial industry who may be able to intro-duce you to those groups or individualswilling to invest.

Often people are afraid to ask friendsfor help, but this can be where you get thebest results when first starting out. Freedatabases are available and should beconsidered, but it is important to knowthat often these companies are affiliatedwith third-party marketing firms, whichmeans you could be charged large feesfrom investments made from investorsthat find you on these databases.

Finally, if you have access to a cap-introevent through your prime broker, it maybe valuable to attend. However, keep yourexpectations in line. A manager shouldnever rely on their prime brokers to raisecapital. If they do, they will be disappoint-ed. It is not the prime broker’s job to raisecapital for hedge fund clients. And re-member, no one can sell your fund betterthan you can.

However, Vioni points out, the cost ofmarketing can seem high at first. Onemight need to invest as much asUS$20,000 in one year to mount a thor-ough marketing campaign.

Therefore, it is important to have athoughtful marketing plan that will giveyou the most opportunities to meet andnetwork with investors, build relation-ships and ultimately raise money.

Facing rejectionFinally, when an investor says they arenot interested in your strategy, it is im-portant not to be discouraged, becauseeven though it might be true today, it may not be next month or next year. Re-member you are in this for the long runand you hope to be building long-term relationships.

Youshouldoffer tocontinuesendingyourperformance data, and nine out of 10 timestheinvestorwillsayyes,becausetheyknowtheyareconstantlychanging thestrategiesthey’re looking at. Vioni says it is vital to re-main on that investor’s radar screen at alltimes. In fact, you should have the courageto follow up around three months after thediscouragingphonecall.

Many hedge funds will not follow upwith people who initially declined to in-vest, because it can be intimidating.

But Vioni explains: “As a hedge fundmanager, you need to adapt a differentpsychological mode when putting on yourmarketing hat.”

Lisa Vioni, presidentof HedgeConnection, has 11years’ experience infinance. Shebecame director of marketing atEllington

Management Group in 1998. In2003 she started up InvestmentManagement Resources. In July2005 Vioni launched the first to-market investor-intro website,HedgeConnection.com.

Rob Arthurs,partner of HedgeConnection,designed and builtthe website HedgeConnection.com.Arthurs has adegree in

marketing and spent three yearsworking as head of marketing anddevelopment at InvestmentManagement Resources.

“When an investor saysthey are not interested, itis important not to bediscouraged becausethough it might be truetoday, it may not be nextmonth or next year”