7 Ways to Position A Hedge Fund for Success during a Recession Threat

By: Shana Bruner, VP, Portfolio Marketing, Backstop Solutions Group

“Recession” is a word that sounds the alarm for many investors. However, the challenges a recession brings can offer unique opportunities to hedge funds. As moderator for our recent webinar, Recession is Coming: How to Position Your Hedge Fund for Operational Success, I learned how this panel of hedge fund leaders improve their firms’ ability to obtain superior results and achieve growth during this evolving economic situation. Here are seven of the insights provided in discussion with Priya Kaftan of Heard Capital, LLC; Lianna Gao of Magnetar Capital, LLC; Jesse Silver of Perini Capital; and Michael DeAddio of Dark Forest Technologies.

1. Be Sensitive to Allocator Stresses

When engaging with allocators, be aware of and sensitive to the stresses they are facing. For example, endowments and foundations often have large private portfolios and may consequently be challenged by the markdown in assets coupled with their liquidity and spending needs. Priya Kaftan commented, “Understand where your current and prospective allocators sit at this moment in time and strategize around how you can add value and build these relationships for the long term.”

2. Attract New Pockets of Investors

Expanding your investor pool is more critical than ever during an economic downturn. To help identify new pockets of investors, our panelists recommended approaches including:

  • Assessing the sources of your existing investor mix to find channel gaps where you do not have as much traction
  • Evaluating information from previously unused external databases and platforms
  • Partnering with local placement agents (particularly in foreign jurisdictions where you may not have a physical presence)
  • Utilizing introductory services for capital introductions.

3. Keep to Your Process

Recessions tempt many investment organizations to panic and scramble. In doing so, they lose one of their greatest advantages: proven process. Michael DeAddio affirmed, “It does not matter whether you are a $15B manager or a $50B manager – rely on your established process to build and sustain your pipeline.” Your process is a steadying influence both for your people and your organization. As a standard playbook, it is something familiar to hold onto amid economic unknowns. And, because it calls for consistent behaviors, it delivers a consistent stream of meetings, prospects, and – ultimately – wins.

4. Know Your Differentiators

After 2008, many people built out their hedge fund portfolios, so there is a saturation of hedge funds in the industry. The hedge fund slots in most institutional investor portfolios are currently filled. Therefore, to appeal to available investors, you must have crisp, clear messaging around your value proposition. For example, perhaps you have the ability to give an investor capacity rights that others do not or cannot offer. Jesse Silver explained, “When you know and can speak compellingly about your differentiators, you can have multilayered conversations with allocators to respond to their specific needs rather than pitching a one-dimensional narrative.”

5. Prioritize Investor Servicing

Investor servicing is key to client retention and expansion and is, therefore, a top priority at any time, but especially so during a recession. Now is the time to assess and improve how you communicate with your investors. For instance, the panelists encourage you to:

  • Reach out to your clients regularly to make sure they are getting what they need from you.
  • Get time on their calendar whenever possible: the impact of a phone call or a face-to-face meeting is incomparable.
  • Understand investor pain points and provide targeted data, education, and insights to become their trusted advisor.
  • Talk about your firm’s investment strategies and illustrate to clients how you gather, synthesize, and action information to create value.

6. Maximize ESG- and DE&I-oriented Opportunities

In recent years, conversations in the institutional investment ecosystem have increased about environmental, social, and governance (ESG) and diversity, equity, and inclusion (DE&I) matters. It can be a challenge, however, to separate talk from action as has been seen in crackdowns on greenwashing and in accusations of firms misrepresenting themselves in these areas. To maximize your opportunities, put in place solid policies for both how you operate as an organization (e.g., having a diverse team in place) and how you select where to invest (e.g., verifying that ESG principles are actually put into practice).

7. Leverage Third-party Technology Expertise

In previous decades, many investment firms built customized systems in-house. Today, with the advances in technology, both small and large firms across the institutional investment industry recognize that partnering with providers of proven, powerful, configurable software makes sense from every perspective. Partnering with the right vendor enables scalability, strengthens information security, and eliminates on-going maintenance requirements. Just as you want to be a trusted partner for your clients, the best technology providers strive to be trusted partners to you. They ensure that you get the full benefit of robust functionality and automation so you can surface data and insights and optimize your efficiency, productivity, and revenue.

By taking a strategic approach to the current economic downturn, hedge funds can take advantage of current opportunities. It was a pleasure to be a part of this panel and to share their insights on how to be well-positioned to succeed both now and in the long term. I encourage you to listen to the full discussion for additional insights here.



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