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Capital Raising: Getting To Grips With The New Reality

Having suffered a steep contraction in assets under management (AuM) during the first quarter of 2020, inflows into hedge funds are once again recovering as institutional investors continue to rebalance their portfolios and chase steady returns. HFR data, for example, found the industry attracted a record $220 billion in the last quarter, fuelled by its excellent performance. [1]  Although this resurgence is undoubtedly a positive development, it does mask some broader challenges.

Firstly, hedge fund launch activity has declined exponentially, falling to levels on a par with post-GFC. Moreover, a lot of these new mandates are being awarded to the more significant hedge fund managers at the expense of smaller boutiques. This is a trend that has been happening for several years now, but Covid-19 has accelerated it. Consequentially, the current crisis is making it harder for a lot of hedge funds to raise meaningful capital, so how should these investment firms be going about it?

Covid-19 re-alters capital raising

Traditionally, there were several avenues by which hedge funds could raise capital. Targeted sales and carefully orchestrated meetings with prospective clients was the most obvious approach, although capital raising events organized by prime brokerage teams sometimes yielded success too.

With physical interactions firmly off-limits due to Covid-19, hedge funds hungry for cash need to rethink how they raise investor capital. Nearly all hedge funds have turned to virtual communications as a means by which to engage and cement relationships with would-be clients.

Some prime brokers – including Goldman Sachs – have developed electronic platforms designed to digitalise the capital introduction process. It is becoming evident that regular business will not resume for some time, so it is essential to hedge fund managers to embrace these new digital channels.

Maximizing the chance of success

The current fundraising environment is callous for hedge funds, with investors becoming increasingly selective about making allocations. In other words, hedge funds need to demonstrate to prospective clients that all facets of their business – beyond only just performance – are best of the breed. Managers must invest heavily in their operational processes and technology systems to maximise their likelihood of being awarded mandates. This means embracing automation and adopting best practices in areas such as operational resilience and business continuity planning (BCP). Those managers who can evidence how well their systems have coped during the recent Covid-19 disruption will be especially well placed to attract inward investment.

Adapt for the future

The next 12 months are shaping up to be very volatile. By failing to apportion adequate resources to technology and operational infrastructure, hedge fund managers could find themselves missing out on lucrative opportunities. At the same time, capital raising methods have undergone an unprecedented transformation. While physical interactions with clients will not disappear over the long-term, it is clear some hybrid approaches will emerge out of this crisis, and it is something managers will have to adjust to. If firms do not adapt, they risk losing market share to those that do.

[1] HFR

Jeremy Siegel is CEO at Portfolio BI


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