Hedging Against Underperformance: Where Hedge Funds Can Showcase Value
Hedge funds were once the darlings of Wall Street, using investments to make millions for their clients. But many funds have not performed to expectation since the 2007-2008 financial crisis. There are some success stories, but by and large, the hedge fund industry has been unable to outperform popular benchmarks like the S&P 500, even during volatile and down times.
These funds were created to allow clients to hedge their investments. But that premise has been lost. Today, it’s still about trying to achieve the highest returns possible when it should be about hedging against down markets, which we’ve experienced over the last year with trade wars and political unrest. What can hedge funds do to get back on track and regain investor trust, with another volatile year projected for 2019?
It’s not all doom-and-gloom for the hedge fund industry. During a volatile 2018, many quant funds and older, more established funds performed well. But that can’t mask the inherent deficiencies in the market.
According to Goldman Sachs, equity hedge funds lagged the S&P 500 by 7% from mid-June 2018 to mid-November 2018. And according to news released January 18 by Hedge Fund Research, equity hedge funds led both outflows and performance-based declines in the fourth quarter of 2018, as investors redeemed an estimated $16.8 billion, reducing total equity hedge fund capital to $871.8 billion. Not to mention, numerous hedge funds closed last year due to underperformance.
Since low-cost options like robo-advisors are becoming more prominent and sophisticated—and because of their solid performance—the industry is being forced to become more cost friendly. To keep investors enticed, hedge funds have already started to change traditional fee structures, moving away from the “2 and 20” model (2% management fee and 20% of profits earned). Despite this, fees are still high compared to other options and most investors aren’t seeing a return on investment that’s worth the cost. Hedge funds need a go-to-market strategy that focuses less on fund performance, which in turn, will shine a dimmer light on associated fees.
Where a Good PR Strategy Comes In
Despite headwinds, an effective PR strategy can address the performance crisis and help rebuild hedge fund reputations. Here are three things to consider:
- Focus on advice – One edge that hedge funds have versus other investment platforms is that they offer unparalleled guided advice. Yes, investors are paying for it, but sophisticated investors who have accumulated a significant amount of investable assets often feel more comfortable speaking with a fund manager about how to invest their money. A successful PR strategy can show investors the value of that guided advice, even during times of underperformance.
- Tout proprietary data – Basing a fund’s entire reputation on historical returns is shortsighted, particularly since times have been so bad recently. Proprietary data can be a real differentiator when explaining how a fund has an edge over competitors. Hedge funds that plant their flag in the ground with propriety data can gain trust and confidence with investors more quickly.
- Address the macro – Hedge fund managers should be more visible as thought leaders, speaking about topics beyond their funds. For example, how are they looking at the 2020 presidential election and its potential effect on the market (think tariffs, trade regulations and tax implications)? They can discuss their expertise from a macro perspective about how the political climate can affect the broader markets (and fund performance).
For so long, the biggest proof point for hedge funds has been performance. But in today’s market, it has to be something else. How will your fund stand apart from the rest?
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