Types of Investor

The main types of investor are ranked below in order of institutionalization. By institutionalization we mean the degree to which an investor has fixed, well-defined methods of investment evaluation as well as guidelines around their investment strategy. The ordering itself is not sacrosanct but purely based on our experience and we readily admit that other people may have had different fundraising experiences.

1. Sovereign wealth funds: funds backed by national governments that manage the investment of government-owned assets.
2. Fund of hedge funds: funds that do not invest directly in any asset class, but rather invest in a portfolio of hedge funds (we include bank-owned fund of funds and asset management arms of banks in this category).
3. Endowment funds: funds which invest assets amassed by institutions such as universities – often through donations.
4. Pension and insurance funds: pension funds that invest pooled pension plan contributions in order to finance the resulting pension plan benefits, and insurance funds which invest the float or other balance-sheet assets of insurance firms to fund their liabilities.
5. Family office funds: funds that invest the assets of very wealthy families.
6. Corporate pension funds: funds that invest the assets of employees of large companies.
7. Ultra high-net-worth individuals (UHNWI): very wealthy individuals who invest directly in diverse asset classes.
8. Retail customers: individuals who invest small amounts of assets that get aggregated into larger pools prior to being invested, by aggregators such as banks.

Key Investor Profile Characteristics

The key investor profile characteristics that are most relevant in determining their attractiveness to a fund are the following (by ‘preferences’ we also often mean ‘requirements’; depending on how ‘set in stone’ these preferences are – there are typically – but not always – exceptions to the rule around some of them):

1. Fund manager track record and reputation expectations.
2. Investor preferences on fund capacity.
3. Volatility appetite/risk tolerance.
4. Investor preferences on legal and operational attributes of the fund.
5. Investor preferences on investment asset class characteristics.
6. Investor preferences on fund investment strategy.
7. Investor regulatory, tax, and legal characteristics.
8. Investor preferences on investment strategy visibility and transparency.
9. Investor preferences on composition of investors in the fund.
10. Sophistication of investor.
11. Investor acquisition and maintenance ease.
12. Investor preferences of liquidity.
13. Fee structure and fee payment schedule.

We will now briefly examine each key investor profile characteristic before discussing how the main types of investor stack up against them.

1. Fund manager record and reputation expectations. All investors value an exceptional track record and reputation. In fact, investors will only vary in the degree to which they require the track record to be proven by hard data, and the degree to which a given reputation must be widely shared among market players, former colleagues, former employers, etc.

   The perceived experience of a fund manager is one of the most important factors for investors when determining a fund's attractiveness, and therefore defines the ease with which a fund will be able to raise and maintain capital. Would-be fund managers will often find it difficult to prove their own track record if they have been trading at a bank's prop desk or under the control of a larger fund (versus a standalone fund). For example, if a trader has been a high-level employee at a trading company or fund, investors can more easily verify his/her track record. Investors will find it harder to confirm the track record of former lower-level employees at a similar company or even a former senior employee at a more opaque company such as a large utility trading desk. In addition, there may be regulatory, legal, and competitive reasons that prevent a fund manager from providing evidence to support their claimed track record.

   Therefore, investors also place great importance on a second form of supporting evidence: reputation. Investors will ‘talk to the market’ in order to build a picture of an aspiring fund manager's reputation in the market. More experienced investors will assess not only their reputation concerning performance, but also other aspects such as behaviour under stress, level of risk taking, and standing as an employee and/or employer. Furthermore, if a trader has no physical evidence of a track record, or must disguise it for legal reasons, only a stellar reputation will give investors confidence in its veracity.

   Investors whose investment decision making is concentrated and investment guidelines are less codified or regulated will be more flexible around whether or not a track record is essential and the degree to which it must be supported by written evidence or reputational anecdotes. Investors who are focused on new or less experienced fund managers may also be more permissive of inconclusive track records. Additionally, it might be helpful to mention that certain investors may be willing (or even prefer) to set-up a managed account given the improved control and transparency compared to investing in a co-mingled fund vehicle. This option may be worth considering for both the new as well as experienced fund manager.

2. Investor preferences on fund capacity. Energy markets have not been around for long compared with, for instance, equity markets. In fact, if we compare Europe's largest energy exchange, the EEX, with the London Stock Exchange, the EEX is considerably smaller.

   As we have seen earlier, the size of different non-oil energy commodities markets varies considerably, and they are to some extent location specific. This means that the maximum amount of capital that can be invested in certain markets and in certain products within those markets is not infinite. In such markets, there comes a point when the positions of one single fund can begin affecting the market dynamics (and become relatively clear to competitors). A fund manager must assess the maximum capital he will be able to utilize before individual trading activity starts to influence markets or reveals the fund's positions to competitors. We call this amount the maximum amount of deployable assets.

   Investors with considerable assets under management will require assurance that the markets a fund trades will have sufficient capacity to absorb subsequent investments beyond the initial allocation. Furthermore, some investors will require that a fund explicitly reserve capacity for that investor within the fund (in essence, reserving a portion of the maximum amount of deployable assets for them).

3. Volatility appetite/risk tolerance. Appetite for risk varies from one type of investor to another. So does their ability to understand the risk implicit in their investment, and hence the potential volatility. Volatility is, very simply, the rate of change of asset prices,¹¹ and some investors dislike (or may not be used to) the monthly reports of a fund showing significant deviations from what they expect monthly ‘average’ returns to be. For this reason, fund managers must be aware of their potential investors' volatility appetite, as an investor with a low volatility appetite may find significant swings in returns on a monthly basis unnerving, causing unease. This may translate into time-consuming ‘hand-holding’ sessions with investors and ultimately possibly lead to redemptions. Volatility in a fund's performance will not be appreciated by investors if it is unexpected. It is therefore crucial to ensure that an investor's expectations are properly managed. Investors will not mind if returns are potentially volatile if they are expecting them to be volatile given the high volatility of the underlying. The key is that investors be aware of this when deciding to invest.
4. Fund legal and operational attribute preferences. Most investors have established guidelines around what legal and operational characteristics a fund must meet. The degree to which these guidelines are codified are a function of how sophisticated the investor is, the degree to which it is subject to regulation, its size (codification usually comes with size), and how concentrated the ownership of the assets are (the more owners an investor vehicle has, the more it will tend to codify investment guidelines). The degree to which these guidelines are fixed depends also on the level of pertinent regulation, and on the degree of control the investor exercises upon his own assets. For example, UHNWIs will be able to be more flexible with applying guidelines, which are more preferences than requirements given that little or no regulation applies to their investment decisions, and they have full control of their assets. On the contrary, a government pension fund will have very strict guidelines fixed by law or other regulations that are inflexible requirements.

   There are a large number of legal and operational attributes that are examined by investors throughout the due diligence process. Certain attributes will be equally important to all investors, and all investors will be looking for the same attribute. Other attributes, however, will be a regulatory requirement for some investors and an inconsequential characteristic to others. For this reason, in the analysis by investor type, we focus on those attributes which are most important to each. These attributes include, yet are not limited to: the legal and tax jurisdiction of the fund, the voting rights associated with ownership of fund shares, whether the fund is publicly listed or not, the quality of the service providers, and the independence of the risk management function.

5. Fund investment asset class characteristic preferences. Although within the world of hedge fund vehicles most trading is done in financial products such as energy futures, the size of the physical energy markets is in fact larger than the financial markets. A fund may decide to trade assets that are difficult to value or not exchange traded. The features of the products in which a fund invests will determine the types of investor it is most attractive to, and those it becomes ineligible to.

   There are several dimensions along which investors will assess the asset classes a fund invests in: the nature of the asset (equity, security, future, option, or physical); whether the asset class is publicly or privately traded (and if publicly traded, whether it is publicly traded on a recognized exchange); some investors will consider the asset represents an ‘ethical’ investment; what the time horizon of the asset is; whether the assets can be valued by market mechanisms, etc.

6. Fund investment strategy preferences. Understanding what products, strategies, and markets an investor is looking for will allow fund managers to focus on investors who are more likely to invest. A fund manager must evaluate if his or her strategy complements or duplicates investments an investor already holds. Additionally, a fund manager would do well to assess whether investors have preferences around the minimum markets they wish their funds to cover in order to achieve diversification and the existence of any products and markets they may have a policy against investing in (e.g., CO² emissions).
7. Investor regulatory, tax, and legal characteristics. Whilst all investor profile characteristics help determine how attractive a given investor is for a fund, their regulatory, tax, and legal characteristics carry greater importance. First, the regulatory restrictions of certain investors may result in the fund itself coming under regulatory scrutiny. For example, the SEC only allows funds to manage a maximum of 25% of their AUM in ERISA money without becoming liable to SEC regulation. Second, taxation characteristics of investors may bring funds under foreign tax jurisdictions. Third, some investors are more prone to litigation in the case of perceived breach of investment contracts, especially in times of poor performance. This litigiousness is also linked to regulatory characteristics, as some investors may be obliged to pursue legal action in scenarios of fraud or other wrongdoing. Greater exposure to regulatory intervention and/or lawsuits requires funds to dedicate more time and resources to managing this risk.
8. Fund investment strategy transparency preferences. Investors may have policies around how much investment strategy or trading information a fund supplies them. Although some investors may be happy with understanding the types of position a fund puts on in the market – their size, length, or correlation – others will only invest in a fund if they are given full visibility of all investments and trades, on a position-by-position basis. For example, some investors will only invest through managed accounts that give full real-time visibility down to position-level granularity. A fund manager must evaluate whether he is comfortable with sharing details of his trading strategy, including current positions, with investors. The risks to consider include the potential of this information being used against him or her, or leaked to competitors.
9. Composition of fund investor preferences. The more institutionalized an investor, the stricter their guidelines around maximum fund stakeholding. Most investors will have policies pertaining to the maximum percentage of the assets in a fund they want to own. Owning a majority stakeholding in a fund may have legal, tax, and regulatory implications, and it is therefore an important limitation for many investors.
10. Investor sophistication. Admittedly, investor sophistication is a relatively subjective concept. Having said that, it is difficult to argue against the observation that investors range from the very knowledgeable to the very ignorant – and that is not necessarily a bad thing. Energy commodity hedge funds for one are not as mainstream as – for instance – equity funds, and there are many investors who are ignorant about the intricacies of energy commodity investing because they have not previously studied the space. Fund managers must therefore evaluate investors with respect to their level of familiarity with the energy commodity space, as some investors will require more education on the subject than others. The implication is that investors will act differently depending on their sophistication, from the acquisition to the maintenance stage. As a function of their understanding of the market, some customers may overreact to periods of volatility, require more explanation about current strategy or performance, etc. All these concerns will translate into additional time and resource investment on the part of the fund manager, who must learn to manage investors with varying degrees of sophistication.
11. Acquisition and ease of maintenance (linked to investor sophistication above). Funds must consider the fact that some investors may require more sophisticated and costly marketing efforts. This may be due to their level of sophistication, since a less sophisticated investor may need to be educated on what energy commodity funds really do. It may also have to do with the fact that they are based considerably far away from the fund, and a lot of travel is involved in acquiring them. It may, however, not have anything to do with sophistication at all. Investors vary in how meticulous they are in their investment appraisals, how lengthy and demanding their due diligence procedures are, and how often they wish to be updated with trading developments. Fund managers should assess how resource- and time-intensive the acquisition and retention of different investors will be, and plan their marketing efforts accordingly. Of course, there may be trade-offs between short- and long-term objectives, as an investor who is more costly to acquire may also have longer investment horizons and therefore remain an investor for a longer time period.
12. Liquidity preferences. The liquidity offered by funds can be a make-or-break feature for certain types of investors. As we have seen, liquidity is a function of the redemption terms, which include the timing of redemption days (when redemptions are permitted – usually at the end of every quarter), the redemption notice period (the minimum time period that must elapse between redemption notification and the redemption day), and the redemption gate (a cap on the percentage of AUM or individual investor money invested that can be redeemed). Investors who are not ultimately the owners of the capital they invest, and pool the assets of others (such as fund of funds do), will only invest in funds whose liquidity terms mirror their own. For example, a fund of funds with quarterly liquidity for its own investors may not afford to have their capital invested in funds locked up for longer than a quarter, as they may have to return it within three months if their investors redeem. This point is less of a problem for investors who are investing their own assets, such as sovereign wealth funds or UHNWIs, but it nonetheless remains an important consideration.
13. Fund fee structure and fee payment schedule preferences. It is easy to overestimate the importance of fees to investors as they are often a subject for negotiation, whilst other aspects such as operational robustness or liquidity terms are not. Having said this, all investors will not be willing to negotiate on fees, or pay fees that are higher than what is deemed to be a reasonable ‘industry average’, unless the competitive advantage or ‘edge’ of the fund warrants it. Investors who are less worried about motivating risk taking or who are sophisticated enough to argue against management fees being charged for average market level performance will insist that a greater portion of the fees be biased towards performance fees. Indeed, some investors may not want to pay management fees at all. In addition to the fee level, investors will be particularly concerned with the payment schedule of these fees. For example, some investors prefer to pay performance fees annually, to increase the exposure of fund managers (in the shape of unpaid performance fees) thus creating incentives for responsible risk taking.

Key Investor Profile Characteristics by Investor Type

1. Sovereign wealth funds. Sovereign wealth funds (SWFs) are state-owned investment companies that manage and invest national savings. SWFs are usually managed central banks, national investment management organizations, or national pension funds. In essence, SWFs are tasked with investing current account surpluses – which in most cases are generated by the export of plentiful natural resources, particularly oil and gas.

   The level of transparency SWFs offer varies greatly, with some being very open about their investment strategy, guidelines, and actual investments, and others being very secretive and opaque. Norway leads the way in terms of openness, with its ‘Government Pension Fund – Global’ (formerly ‘The Government Petroleum Fund’) having become the leading openness benchmark.

   Most SWFs invest in both financial and non-financial assets, and are perhaps slightly more on the longer-term time horizon end of the spectrum. SWFs tend to prefer portfolio-type foreign investments to direct foreign investments, and have increasingly been investing in hedge funds. There is growing concern that some SWFs are motivated by non-financial objectives, however, this should not impact their participation in hedge fund markets.

   The investor profile characteristics of any given SWF are a function, primarily, of how transparent they are. More opaque SWFs will tend to be more flexible in their requirements, given that the public cannot scrutinize their decisions. Transparent SWFs will have more numerous, demanding, and clearly established guidelines, and will not compromise on their requirements.

2. Fund of hedge funds. Fund of hedge funds (FoFs) are pooled investment vehicles that allow investors to diversify their investment across a number of individual hedge funds. FoFs that invest in only one type of strategy, asset class, or industry are known as single-strategy or niche FoFs and those that invest across a range are known as multi-strategy FoFs. FoFs are usually more flexible with respect to a fund manager's track record.

   FoFs monitor performance more closely, generally on at least a quarterly, if not monthly, basis, given their underlying clients can usually redeem on a quarter's notice. As a result, they are known to be less ‘sticky’ money as investors in FoFs are frequently ‘less sticky’ themselves. Fund managers tend to have an aversion to this type of money given that lack of stickiness can put the liquidity of the fund at risk and force unwanted position closing in a worst-case scenario.

3. Endowment funds. Endowment funds invest assets amassed usually through donations, such as for a university.
4. Pension funds and insurance funds. These are funds that invest pooled pension plan contributions in order to pay for future financial obligations that the pension will have to pay to its contributors and funds that invest insurance firm assets.
5. Family office funds. These funds invest the assets of very wealthy families; they can be single-family offices (SFOs) or cater to a number of families as multi-family offices (MFOs).
6. Corporate pension funds. These funds invest the assets of employees of large companies.
7. Ultra high-net-worth individuals. These are individuals with very considerable assets who invest directly in diverse asset classes.
8. Retail customers. These are individuals who invest small amounts of assets that get aggregated into larger pools prior to being invested, by aggregators such as banks.

Pre-Launch

The investors most likely to invest in pre-launch funds are investors who believe they have a certain edge in this particular form of investment, namely pre-launch investing – also known as seeding. Certain FoFs and high-net-worth individuals are the investors most likely to be pre-launch investors.

Traditionally, late-stage investors tend to invest earlier and earlier given increasing competitiveness among investors for certain types of fund. Many outperforming energy commodity hedge funds are often oversubscribed and are closed to new investors who did not get in early enough. Furthermore, there is a perception that pre-launch or early-stage investing has a higher prospect of reward. Having said that, although it is generally accepted that early-stage funds have a higher than average return vs. later stage ones, many argue this is because early-stage funds take on higher risk, and so from a risk-adjusted point of view, early-stage funds do not necessarily represent a better opportunity.

Seed investors also contribute to the marketability of a fund to other investors, so a fund manager may attempt to get on board an investor with a reputation good enough to encourage investment from others. For example, a commitment to invest from a well-respected FoF will likely encourage other investors to commit as well. The efforts of the pre-launch manager must be focused on investors that have a track record of considering and investing in ‘would-be’ funds. Furthermore, they must attempt to bring on board investors who, by their very commitment, make the fund more attractive. These ‘votes of confidence’ from well-respected investors are worth their weight in gold.

Seed investors may, however, demand some extra reward in return for exposing themselves to the risks involved when investing in an unproven fund manager. These rewards may include lowering or waiving the management fees, lowering the performance fees, or part ownership of the management company or some sort of revenue sharing arrangement. If part ownership is agreed, the fund manager is usually granted the right to buy back the seed investor's ownership interest in the management company after a certain period of time, or to pay out higher shares of their revenue or profit for periods of time as a ‘buy-out’ mechanism. Sometimes such buy outs are enabled only if the fund achieves pre-agreed performance benchmarks. The nature and structure of seed deals vary immensely from one seed investor to the next, and indeed from one deal to the next within a seed investor's portfolio.

Many investors will have a policy of not investing in pre-launch funds. Many FoFs, institutional investors, endowment funds, family and professional offices, and SWFs have strict guidelines that prevent them from investing in any fund before launch, and even during the first 12, 24, or 36 months of operation. Given most funds that cease trading do so in the first year, many investors believe the risks far outweigh the potential upside when investing with early-stage funds.

Note that as per our discussion above, if the fund manager is very well known, his ‘new’ fund is not strictly speaking a pre-launch fund. Some managers who are starting ‘new’ funds but have a demonstrable track record, who for example recently shut down their prior fund, may be able to bring with them some of their previous investors as seed investors in their new fund and circumvent minimum ‘firm track record length’ constraints.

Early Stage

Once a fund has launched, there is a whole new set of investors who become potential targets for a fund. Some investors who are not willing to consider pre-launch, do consider investing within the first year of a fund's existence. In addition to a more extensive number of FoFs and high-net-worth individuals, early-stage funds can focus on certain family and professional offices, and endowment funds. The latter group are very often open to investing in early-stage funds. It is important to note, as we have above, the positive spill-over effects of having certain investors already invested in a fund when attempting to acquire new ones.

This ‘positive herd effect’ is particularly noticeable during the early stage of a fund. The presence of a well-known FoF in the investor portfolio of an early-stage fund, for example, is a great vote of confidence in the eyes of family and professional offices. If a reputable FoF is invested, they will conclude that the fund has passed a rigorous due diligence and investment rationale examination. FoFs are known to have more stringent and carefully defined due diligence policies, and they usually have a significant investment and diligence team of professionals to appraise each investment opportunity. As some family and professional offices have less manpower, or specific sector expertise, they sometimes rely on previous investor composition as an indicator, or at least a confirmation that the fund in question is robust.

Late Stage

The late stage is, in itself, a pretty good place to be for a start-up hedge fund. Having survived the first full year of operations is a testament to a fund's sustainability. Investors recognize this, and practically no investor will have a lifecycle-based guideline against investing in a late-stage fund. Pension funds, other institutional funds such as banks or insurance funds, and SWFs, will be potential investors to the late-stage fund though for these types of investors they may require a track record longer than a year. That said, at this point, the most risk-adverse investors, with the most stringent guidelines start to become potential investors.

Marketing Channels

There are a variety of ways in which funds can raise capital: in-house marketing teams, prime broker capital introduction teams, third-party marketers, and FoFs. We shall review what each option entails, what the typical terms and fees are, and their strengths and weaknesses.

In-house marketing team. A fund may choose to buy or build marketing capabilities in-house, creating a marketing team exclusive to the fund. Having a team focused exclusively on marketing one fund is of course beneficial in that it can count on 100% of the marketing effort. An in-house marketing team will have a deep understanding of the fund, and be able to tailor each investor visit only to the fund it markets. Arranging potential investor meetings with only one fund in mind may allow an in-house marketing team to truly focus its efforts and increase its success ratio. Furthermore, it will be better able to determine and control how the fund is marketed, and ensure the fund is accurately and fairly marketed. With an in-house team, there may be a financial benefit if the cost of developing and retaining own marketing staff is less than the fees prime brokers or consultants would charge.

There are, however, downsides to in-house marketing. First, unless the team has prior experience marketing other funds, or the fund manager has an established record, it is hard for new teams to quickly build up an investor base. Building up an investor base, especially among institutional investors who prefer dealing with those fund managers and marketers they have long-established relationships with, is a time-consuming job. It is therefore probably not the optimum solution for an early-stage fund to invest in in-house capabilities, unless it can market on the back of a fund manager's well-established reputation or it hires a senior enough marketing team that can bring relationships with them.

Second, marketing brings with it some regulatory obligations. In the USA, for example, a fund may have to register as a broker-dealer if it is to market itself, and there are limitations to soliciting investments if a fund wishes to remain exempt from registering under the Securities Act of 1933, and the Investment Company Act of 1940. If a fund wishes not to register with the SEC, solicitation and advertising restrictions may prove to make effective marketing impossible. A US fund may avoid acting as a broker-dealer when employing in-house marketing staff by making use of an issuer exemption, with the condition that its marketing team is not incentivized through compensation linked to their marketing efforts.

Third, a fund manager may get unnecessarily distracted by the in-house marketing team. A fund manager may develop a close working relationship with the in-house team, which becomes a time-consuming distraction that prevents him or her from focusing on investing. Fund managers and in-house teams must work together to minimize the impact of marketing on the fund manager's role as investment manager, keeping the number of investor interactions to a minimum.

Prime brokers. Prime broker firms arose out of the need of asset managers to consolidate their trading, execution, clearing, financing, lending, and cash management services under the roof of a single service provider. Often a division of a global investment bank, prime brokers introduced value-added services into their offering to differentiate themselves, and capital introduction was one of these services. Prime brokers can offer their hedge fund clients introductions to qualified investors they believe will be interested in investing in a particular fund. Prime brokers tend to be more successful in attracting money from their bank's client base, which may include UHNWIs, FoFs, and institutional investors to varying degrees.

It is unusual for prime brokers to charge for their capital introduction services (their revenues are usually derived from financing, trading, and clearing fees), and may therefore be an attractive offering to fund managers. Indeed, there are a number of very capable prime brokerage teams in the market who are very efficient at sourcing capital from their customer base. In addition to being ‘free’, utilizing a prime broker as a marketer, especially if the prime broker is part of a reputable institution such as a global investment bank, can augment a fund manager's internal marketing efforts.

There are, however, several drawbacks to using prime brokers exclusively as a fund manager's marketers. First, capital introduction being a non-core – and technically a non-fee-generating service – could mean that their capital introduction efforts are not as great as a fund manager would like. For example, many prime brokers organize large conferences for a multitude of funds to meet a select group of investors. It is not unusual for these conferences, however, to not have a significant impact on fundraising efforts. Service providers and other funds usually far outnumber investors, and the generic design of such events often results in investor needs not being matched to investment opportunities. A fund must assess its own value to a prime broker. If a fund is at the smaller end of the spectrum in the portfolio of a given prime broker, or it simply generates less fees (for instance because it does not sell short or leverage its positions very often), a prime broker's capital introduction team may dedicate less of its time and effort to it than the fund requires.

Second, prime brokers may not be as close to the details of the fund as an in-house team or a consultant may be. Prime brokers usually spread their efforts across a large portfolio of funds, and their marketing efforts many times include having investors meet a large number of funds on one day, or organizing conferences for funds to present to investors. Although this breadth of exposure may be beneficial in raising the profile of the fund, it is also likely that this less focused approach will produce a lower success rate and demand a large investment of a fund manager's time that yields little reward.

All things considered, prime brokers can most definitely complement an in-house or consultant-based marketing effort. Given that many prime brokers will offer this service as part of their brokerage package, it would be unwise not to take advantage of it to some extent. Nevertheless, an assessment of how useful prime broker-arranged investor introductions are should be carried out. There comes a point when the opportunity costs of attending investor meeting days or investor conferences will outweigh their benefit. It is crucial to understand how attractive the potential investors introduced by the prime brokerage are, and therefore funds should enquire about them prior to committing to meet them.

Third-party marketers or capital introduction consultants. Companies who specialize in capital introduction for hedge funds are known as third-party marketers (TPMs) or capital introduction consultants. As external providers of marketing services, TPMs are also increasingly involved in helping funds design their strategy or market positioning. We will review that trend of deeper involvement at the end of this section.

TPMs typically negotiate an ongoing participation in the fees generated by the capital they introduce, typically 20% of both management and performance fees (we shall call this the ‘participation in fund fees’). Some TPMs only include performance fees in their revenue sharing, and exclude management fees. Others include retainer-based fees, especially if they agree to exclusivity (discussed further below) or to providing dedicated resources. In addition, some also charge an introduction fee on raised capital, especially if it has longer lockups than quarterly redemption cycles. Note that early-stage funds must often agree to higher fees, and sometimes TPMs may demand equity participation in the investment firm as well.

When negotiating an agreement with a TPM, the terms and conditions under which a TPM can claim fees for an investment must be clearly set out. The agreement with a TPM usually covers any affiliates of the fund manager, so if a fund manager controls more than one fund (be it through control of other legal persons or entities), the TPM will be compensated irrespective of whether the investment is made in the fund initially proposed to the investor as an investment opportunity.

TPMs will typically be entitled to compensation for all future investments and incremental investments made by investors introduced to a fund during the term of their agreement. The agreement will cover the eventuality of the fund manager starting up a new fund, whether it is related to the original fund and its entities or not. If investors introduced by a TPM invest again in one of the same fund manager's successive funds, the TPM's claim to its participation in the fund's fees will still apply for an agreed period of time even if the agreement has expired (usually six months to a year). In any case, TPMs will also specify that they are compensated for investments made by investors that were introduced during the agreement term for a period of time after the term of the agreement has expired (usually at least for one year). This provision ensures that TPMs are adequately compensated for having introduced an investor, even if the investor does not make a decision to invest until the TPM agreement has expired.

There are exceptions to these terms. Some TPMs may not demand fund fee participation in perpetuity. They may limit this participation for a fixed period of time, or implement a timeline under which the participation is reduced over time (a ‘sunset’ or ‘waterfall’ structure). This is especially the case for TPMs that do not wish to be responsible for an ongoing marketing effort and are simply introducers. An agreement with an all-round TPM should allow room for special introductions by a pure ‘introducer’ or ‘finder’ who is not responsible for marketing that fund on an ongoing basis, but who at a given point in time has approached the fund to introduce an investor the main TPM has not identified.

This last exception brings us to an important aspect of TPMs, and that is the extent of their responsibilities versus those of the fund manager with respect to marketing. From the TPM's point of view, we have discussed their role as the ongoing marketer of the fund. They should be in charge of the day-to-day marketing and be proactive in their efforts. Agreements can always be drawn up to include minimum amounts to be raised in set amounts of time with reductions in fees if they are not met. That proactive approach and expectation of delivery (however contractually structured) is the responsibility of the TPM and what differentiates them from more opportunistic ‘introducer/finder’ TPMs.

The responsibilities of the fund manager vis-à-vis the TPM are numerous. Before any investor has committed to invest, the fund manager must dedicate time and resources to help create marketing materials, attend investor meetings, and answer any questions investors may have. Once invested, the fund manager must also communicate with investors with the regularity and detail that the TPM will have agreed (having pre-agreed it with the fund manager). The fund manager will have to prepare monthly performance reports reviewing recent developments in the market, noteworthy allocation decisions, and fund performance. The fund manager will have to ensure the TPM is kept up to date on any expected or unexpected changes that result in the materials the TPM is using to market the fund becoming obsolete or misleading (e.g., any changes related to the fund manager, or the fund's strategy, performance, legal, compliance, or organizational circumstances). The fund manager will have to provide subscription and redemption data for each investor – for the purpose of calculating the compensation they are due, TPMs require full access to the fund's records (normally through the fund's administrator). As one may expect, fund managers tend to underestimate the time and resources they must dedicate to fulfil their obligations to the TPM. All fund managers should factor these into their plans.

A TPM agreement must allow enough time for the TPM to understand the fund, chart its growth objectives and development plans, carefully design the marketing strategy, prepare the marketing materials, identify appropriate investors, and conduct the marketing process. Fund managers must balance the fixed time commitment of an agreement – and the cost it entails – with the TPM need to spend significant time designing the strategy. If the agreement period is perceived by the TPM to be too short (and the participation in fund fees is somehow limited with regard to the agreement term length), this may incentivize it to bring the fund to market in a hurried fashion, without investing enough time in planning or preparing materials, because it wants to maximize the fees it generates in the agreed time period. Because most agreements allow for TPM participation in fund fees subsequent to agreement term expiry, the TPM concern is in reality more about what the exclusivity situation will become at time of expiry, and this thought process is one the fund manager should follow when negotiating agreement length.

The length of TPM agreements varies, but they are usually not less than a year and more often than not somewhere between two and three. The longer terms will be particularly applicable if the agreement is with a pre-launch or early-stage fund whose appeal to investors is not overwhelming, and therefore does not guarantee a rapid influx of capital in the eyes of the TPM. Fund managers should consider that the longer the term a TPM demands, the more warranted he is to introduce a timeline establishing targets in terms of minimum amounts of assets raised. A fund manager could introduce an automatic termination clause if those targets are not met.

Other than fees, exclusivity is the greatest issue of contention in TPM agreements, and exclusivity is a double-edged sword. TPMs may seek a commitment from the fund that it will not hire another TPM, entity, or individual to raise money for the fund. A fund may also demand the relationship be mutually exclusive, in which case not only does the fund agree to only employ one TPM, but the TPM agrees to not provide its services to any other fund in the same market or product class.

It is important to note that if exclusive, the fund will compensate the TPM for all investors entering the fund. The TPM is compensated irrespective of whether the TPM single-handedly identified the investor and made a successful sale. For example, if an investor contacts the fund directly (having heard about it from another investor), and the fund refers them to the TPM, the TPM still charges its fee.

Having said that, it is common practice to draw up an ‘excluded from agreement’ investor list prior to a TPM agreement that lists the investors the fund already knows and is in discussions with. The TPM will receive no compensation for investments by any of these excluded investors. Exclusivity simplifies the relationship between the fund and the TPM, and eliminates the grey area around determining whether or not an investor was introduced by the TPM or simply ‘convinced’ by it.

If the relationship is not exclusive, there should be an agreed method by which the TPM can ring-fence investors at regular intervals. By ring-fencing certain investors, the TPM will specify the names of potential investors that the TPM is proactively marketing the fund to, and for whose investments the TPM will be compensated. A non-exclusive agreement encourages the TPM to include as many investors as possible in their ring-fenced list, to protect their potential compensation. This can lead to a spiral of ring-fencing, especially if there are several TPMs engaged in an agreement with the same fund. The TPMs may end up including almost all potential investors on their individual lists, leading to conflicts between TPMs for ownership of investor relationships.

A similar situation is created if the fund itself ring-fences investors (in essence enlarging the initial list of excluded investors on an ongoing basis). It is reasonable for a fund manager to want to avoid paying fees to the TPM if he is primarily responsible for bringing an investor in as a result of marketing his fund on an ad-hoc basis in parallel with the TPM. However, it is advisable that the fund manager draw up a pre-engagement exclusion list of all the investors he has a relationship with and not subsequently grow this list. This avoids distracting the fund manager from his investing role, avoids arguments with the TPM, and avoids duplication of fundraising efforts. The fund manager should simply refer a potential investor to the fund's TPM.

In general, the competition engendered by non-exclusivity can be counterproductive and difficult to manage. If a fund refers investors to several TPMs that will duplicate efforts, and not necessarily motivate the TPMs to dedicate maximum time to that fund, given that they are facing competition and may lose out on the deal. We feel that exclusivity is preferable to non-exclusivity, and the latter should only be agreed to if carefully planned.

An established portfolio of clients is probably a TPM's most important asset. The more diverse it is in terms of investor types (FoF, pension fund, endowment, etc.) and geographical coverage (pan-European, cross-continental, etc.), the more powerful it will be. The breadth of the investor portfolio will ensure their relevance independent of fund strategy, geographic coverage, or life stage. Some TPMs are particularly focused on a certain investor type, such as family office-focused TPMs, and others are very country focused; for example, covering Switzerland-based clients. Established local relationships and understanding of local investor preference is particularly relevant for transatlantic capital introductions, as investor preferences – even within the same investor type – may vary.

Certain TPMs are sector focused, and within that group some are particularly focused on energy commodities. Funds should attempt to focus their efforts with regard to fundraising, and one of the most efficient ways to minimize time spent on such activities is to involve a niche TPM with sector-specific expertise. They will introduce funds to investors they know have an interest in that particular space. This tailored approach should increase the success ratio of the marketing efforts, and minimize the time spent by fund managers in fundraising meetings. A contrary argument, however, is that by marketing funds which are similar to each other, a TPM may increase the competition between client funds, especially with regard to investors who are only looking to invest in one fund in a given space.

Fund managers should be aware that TPMs not only charge significant fees, and require a significant amount of time, but they also perform detailed appraisals of the funds that may wish to engage them. The due diligence TPMs perform vis-à-vis potential client funds is part of the process through which they collect an understanding about the investment features, operations, and goals of the fund. Fund managers should take into account the investment of time required to go through this due diligence process and minimize its impact on investment activities. Furthermore, fund managers must realize this process is not only to allow the TPM to ensure that a fund is worth representing; they should seize the opportunity to evaluate the quality of the TPM. Funds should assess TPMs around a number of dimensions:

• Investor base breadth. A diverse make-up of investors will ensure higher chances of a potential fit. Alternatively, funds may seek out TPMs with an investor base concentration among investors that suit their strategy, sector, or life stage. For example, a pre-launch fund should seek out TPMs with a high concentration of investors interested in seeding opportunities.
• Geographic coverage. A broad geographic span is important in that it increases the addressable market. Coverage of either Europe or the USA is of course crucial give the concentration of assets in these two regions. Asian coverage is increasingly important, and more so within the space of energy commodities, a very popular space among Asian investors.
• Sector/product specialization. TPMs who specialize in a certain space or strategy may be able to offer higher chances of success given their particular knowledge. In addition to better understanding the funds offering, it should have an investor base with experience and interest in the space.
• Dedicated resources. The planned resource and time commitment from a TPM must be sufficient to maximize the chances of success. A fund should inquire into the level of dedicated resources it will receive. Some TPMs have dedicated teams for each account, others are spread thin. Note that if a TPM offers dedicated resources, it may more forcefully argue the need for a retainer to be paid to cover the duration of the engagement.
• Marketing material quality. Fund managers should request to see some sample marketing materials prior to working with a TPM. The key to successful marketing is not only performance, but the professionalism, focus, and relevance of its marketing strategy.
• Image and brand. Marketers are, at the end of the day, ambassadors for your company. For this reason a fund manager must ensure their chosen TPM projects the image he or she wishes to be associated with.
• Legal and compliance expertise. TPMs have particular regulatory obligations given their role in soliciting investments (as discussed, these are particularly stringent in the USA¹²). Fund managers must ensure their TPM has all the necessary regulatory registrations and approvals, and that they are knowledgeable about the developments in financial product marketing legislation in all the geographies in which they operate. In addition, TPMs should be particularly knowledgeable in anti-money-laundering and KYC legislation.
• Track record. Fund managers should demand information around a TPM's past achievements. Although not a guarantee of future performance (much like a fund!), a TPM's track record in terms of assets raised should give a fund manager a good indication of their quality, or at least their experience to date.
• Portfolio of fund clients. A TPM may not be willing to disclose every one of his clients, but in relation to the question around dedicated resources, it is also important for fund managers to understand which other funds a TPM firm represents. If a TPM represents direct competitors, he may not be able to serve both as well, given the obvious competition between them (in the case of a sector-specialist TPM this is of course an implicit reality).

Teams which help raise funds – be they in-house, prime brokers, FoFs, or TPMs – may also create value beyond purely introducing capital to a fund. This is because they become de facto consultants to the fund manager beyond their asset-raising remit. In addition to capital introduction expertise, high-quality marketers will accumulate expertise regarding how a fund manager can increase the attractiveness of his fund. Marketers understand what investors want, and can be very valuable advisors when it comes to ensuring the positioning, structuring, and strategy of the fund maximizes the addressable market. For example, marketers may advise on particular legal entity designs that make the fund more appealing to certain investors. Fund managers should note that in-house teams with prior experience and TPMs will be the two types of marketers that will add the most value beyond their core competency given that they will (usually) have more in-depth knowledge of the fund and potential investors (e.g., compared to a prime broker or a FoF).

Fund of funds as marketing channels. FoFs offer diversification across many individual funds, and their offering is simply the sum of its parts: the underlying funds. By accepting FoFs as investors, funds effectively allow FoFs to serve as indirect marketers for them. The degree to which this marketing is explicit varies from one FoF to another. Some FoFs will not disclose which funds make up their portfolio, whilst others are very open about particular relationships. Large FoFs are increasingly associated with large institutional investors, who demand a more transparent relationship and a higher degree of disclosure around investment allocations. FoFs at the more transparent end of the spectrum will typically reveal details such as which funds they have the largest holdings in (if not all), what percentage of their fund each of those holdings represents, or what their stakeholding is in each of the underlying funds. Another reason why some FoFs market underlying funds more explicitly is that FoFs become more closely associated with funds they have made an early-stage investment in. Many funds grant FoFs preferential investment terms if they are an early investor, and one of these perks may be a capacity reservation. Under such an agreement, the FoF has the right to invest an agreed amount of further capital in an agreed time frame (or a percentage of new capacity created).

FoFs therefore present their capacity reservation agreements with funds that are otherwise closed as part of their value proposition to investors. Furthermore, FoFs may associate themselves with particularly renowned and over-performing funds in order to raise their own profile and underline their discerning investment decisions.

Word of mouth. Although not an easily controllable marketing channel, word of mouth plays an important part in generating introductions for a marketing team. Although it should not be relied on to generate leads, fund managers should be aware that word of mouth can be a source of investors, and they will find themselves referring investors who contact them directly to their marketing team (be it in-house or not). Word of mouth is more effective in generating FoF and UHNWI leads who talk more among themselves and interact more with the market. Institutional investors like pension funds, endowments, and SWFs are less social creatures that rely less on word of mouth and will therefore require targeted approaches.

Pre-launch and early-stage funds will usually be unable to afford setting up an in-house marketing team, especially if they want that team to bring experience and contacts with them. Some funds may be able to afford building in-house capabilities, but will realize – after a relatively brief analysis – that investing the budget in bolstering their analytical and trading capabilities will increase their value-generating capacity to such an extent that it outweighs the potential savings to be had by cutting fundraising costs. Money is far better spent by start-up funds on research, analysis, and trading capacity than it is on building or buying marketing expertise.

Prime broker capital introduction services are an avenue worth exploring, but must be used wisely or they will take up a lot of a fund manager's time. In addition, they may not be as focused or knowledgeable as is necessary given their broader remit and the ancillary nature of their existence. TPMs are probably the best option in that they bring with them experience and their own database of potential investors. Many institutional investors in particular are more easily accessible through TPMs who have established relationships with them. TPMs can also add value by advising on ways to make the fund more attractive, and give input on fund strategy design with regard to its predictable impact on the marketability of the fund.

The Monthly Performance Report

The monthly performance report is a brief report covering the main features of the fund, updated monthly with performance data and commentary around relevant market developments. Given that there is little performance to report pre-launch, this report is in the realm of early- or late-stage funds. Before trading begins, however, some start-up fund managers might consider writing a market commentary that will obviously not include performance (as nothing has been traded yet) but will include a fund manager's view on the market.

Once trading begins and performance can be reported, a fund manager will write a report also known as a monthly letter, monthly report, or in some variants a ‘teaser’. The latter term alludes to its function as a tool to entice investors to investigate the fund further. This is because not only do investors currently invested in the fund receive the performance report as a monthly update on how the fund is performing, but prospective investors are sent it too in order to encourage investment. One could argue that the main objective of this latter style of report is to sell rather than inform. Some funds will have longer in-depth monthly reports to current investors and shorter teaser versions for prospects. Prospective investors who are not yet interested enough to participate in an initial marketing meeting, or perform a due diligence visit, will be sent this latter format of the report as a way of ensuring the fund remains on the radar screen, and ultimately warrants a closer look.

Like all good selling materials, the monthly performance report must tell a compelling story. It must be well designed, with a clear layout making it attractive to read. In addition, it must be as informative as possible, answering the potential questions investors will have when reading it. When trying to design the content to pre-empt potential questions, a fund may consider tailoring their monthly performance report differently depending on whether the recipient is a current or a prospective investor. Current investors will be more interested in the performance, and the market and portfolio commentary. The version for prospective investors should be weighted more towards pointing out the fund's unique competitive advantage. Larger funds may afford the time and resources required to tailor the monthly performance report even further, based on group or even individual hot-buttons. Naturally, the more targeted the materials, the more effective they will prove to be.

To create a compelling story, the document should highlight the strengths of the fund, describing its competitive advantage, what sets it apart from other funds. An effective monthly performance report will contain the following information.

1. Intuitively displayed return performance data. Performance is what investors seek and the first thing they will want to see. This applies to both current and prospective investors. Return performance figures should be displayed by month for the full lifetime of the fund. It is also standard practice to include the returns calculated in terms of year to date, inception to date, and compound annual return. To ensure correctness (or at least decrease liability for possible errors), fund managers should utilize administrator calculated and approved figures as well as send investor weekly internal estimates via email. Fund managers should note that performance data should always reflect the returns under standard investment terms. This implies that existing investors who have negotiated specific investment terms (lower performance fees, for example) may find the report informative overall but less useful in terms of absolute figures reported.
2. Insightful and widely used performance metrics. In addition to straightforward return measures, investors will expect to find a number of standard statistical measurements around performance and volatility. Although there are a myriad of statistics to choose from, the two most commonly used are standard deviation and Sharpe ratio. Standard deviation measures the variation of a fund's return over a set period of time. In essence it shows the extent to which a fund's returns are consistent to its mean return, and hence ‘predictable’. It is common practice to show annualized standard deviation (i.e., volatility) and to do so for every relevant time period (annual or year to date).

   The Sharpe ratio has become an industry standard measure for risk-adjusted fund performance and all investors will expect to find it on the monthly performance report. It was originally devised to measure the rate of return generated by a fund relative to the amount of risk taken to achieve the return (i.e., rate of return generated per unit of risk). This ratio measures the rate of return above a minimum risk-free rate, because a low rate of return is always achievable by taking no risk. The Sharpe ratio is hence calculated as the average excess return divided by the volatility of excess returns. The higher the excess return or the lower the volatility, the higher the ratio and the better performing the fund manager is thought to be – because he has provided the most return relative to the risk he took. Having said that, the issue with this ratio is that it employs volatility as a measure of risk, and volatility is not necessarily representative of risk. It is a fair proxy in some cases, but a poor one in most. Risks will have been taken to achieve a certain rate of return, which will not be reflected in the volatility. With that caveat in mind, funds can argue that when comparing funds within the same space, and with similar strategies, the non-captured risk may affect the compared funds similarly and to some extent cancel out.

   To show risk, some funds use what has become commonly referred to as the Sortino ratio. One could argue that this ratio is a more ‘helpful’ alternative to standard deviation, given that standard deviation takes all deviations into account equally, i.e., large positive surprises lead to higher volatility although usually no investor would complain about this. What investors usually worry about are large deviations of returns to the downside and Sortino and other ratios try to address this by looking specifically at only the negative side of the return distribution rather than all return realizations. To illustrate this, consider a fund that delivers consistently negative returns of –3% to –4% a month. It will have a very low standard deviation but that does not make it a fund worth investing in. Conversely, a fund with relatively volatile positive returns could arguably be said to be ‘penalized’ with a high standard deviation even though its volatility is ‘good’. The Sortino ratio intends to only capture negative deviation. Rather than measuring volatility across the universe of potential returns, it limits its measurement of volatility to downside deviations below a set level of return. Detractors of this measurement would argue that this understates the risks taken to achieve the positive returns but which did not negatively impact them. Note that when ignoring a part of the realized return distribution an investor would chose to ignore data with additional informational content. As many hedge funds only report monthly returns, cutting-off data points from the analysis may lead to a situation where results are no longer statistically significant. For instance, in order to calculate a meaningful number for standard deviation at least 30 data points are needed (i.e., 2.5 years of monthly data). Assuming that 50% of months are positive, however, by cutting-off positive realizations this would now require 5 years of track-record. This issue can solved if more frequent returns are made accessible.

   There are strategic decisions to be made with regard to which statistics should be featured on the monthly performance report. Although the measures discussed above will be expected, and raise eyebrows if absent, there are many ways to tailor the selection of metrics to tell a story as compellingly as possible. For example, if there was a change that improved performance considerably – a shift in strategy, a new trader, new risk management processes, or increased geographic coverage – it may be useful to define a time period commencing at the time of the change, effectively segmenting the fund performance into a ‘before’ and ‘after’ time period. Defining the reference time period to one's advantage can also be achieved by using rolling return data, to emphasize performance since inception and not be bound by calendar years. A final example would be the treatment of a high standard deviation resulting from positive volatility. As an alternative, the Sortino ratio could be used to display a ‘better’ ratio. Although performance ‘is what it is’, strategically chosen performance metrics will help turn a fund's performance into a compelling story. The objective of the monthly performance report is to both retain current investors and attract prospective ones. With respect to the latter objective, all the report must achieve is to prompt a more in-depth due diligence process and hence the information displayed must not be complete, simply sufficient.

3. Relevant performance benchmarks. Investors will appreciate it if the monthly performance report does the grunt work in terms of providing them with the necessary comparative analysis and data. Investors will of course perform their own comparisons, but the power of comparative analysis showing your fund outperforming the competition is a very compelling selling tool. In addition to standalone performance metrics, relative metrics highlighting the performance of a fund relative to its peers (i.e., funds with a similar strategy and trading in the same space) could be very powerful – assuming the comparison is favourable of course.

   The benchmarks must be chosen to ensure the most relevant comparison, whilst also showing the most favourable comparison possible. This trade-off between relevance and convenience is not always an easy ask to resolve, given that investors will assume the comparison was not particularly flattering to the fund if it did not include a standard benchmark. Strategic selection, however, is again important, just as it is in choosing performance metrics. Although comparative analyses are usually focused on performance, volatility benchmarking can be useful as well. For example, a fund aiming for low returns and low volatility relative to its peers may seem unattractive from a pure return perspective. Benchmarked in volatility terms, however, it may satisfy the return profile of an investor looking for a lower-return/lower-volatility investment. Remember, a fund must always make sure to obtain approval to include these benchmarks if such approval is necessary.

4. Market and portfolio commentary. Current and prospective investors alike will pay particular attention to commentary around recent developments in the market, and changes in the fund's portfolio allocation. Commentary plays an explanatory role, building on the numerical data and explaining the drivers behind the figures. It should be used to explain both negative and positive trends, and give a feeling for future market opportunity. It will usually be written by the fund manager, with input from his team, and should include topics such as:
   • recent and future market developments;
   • recent fund performance relative to the market, and the drivers behind it;
   • the drivers behind any major performance or volatility swings (positive and negative);
   • a high-level commentary on major trades (profitable or otherwise);
   • typical portfolio allocation and any recent changes in its composition.

   The primary concern of fund managers in composing the market commentary, and describing the portfolio allocation, will be not revealing too much. It must be assumed that although these reports are sent out as confidential and proprietary documents only intended for the use of the recipient, they will be disseminated further to third parties. Fund managers must be secretive about their trading approach for obvious reasons, but they must also be informative and insightful enough in their updates to create a rapport with existing investors, and allow potential investors to build an accurate picture of the investment opportunity. Fund managers will typically reveal certain positions only once they have been exited, and only indicate portfolio composition at a high level (by product or geography). Funds will find that depending on the lifecycle, the degree of transparency must be tailored. Very young funds, for example, may have to reveal more detailed information to attract investors, whereas established ones can get away with being less informative. With both existing and prospective investors, but particularly with the former, monthly or quarterly updates in the form of face-to-face meetings or conference calls will supplement the market and portfolio commentary. It is safer for funds to go into more detail in conversation, and in doing so they can also tailor their transparency to the needs and preferences of each investor, only revealing what is required.

5. Key investment information. Presenting an overview of the key investment information in one easy reference document is very helpful to investors. For some fund managers, this might be a term sheet or a page in a presentation that represents information that might be found in a term sheet. A good marketing document should make it easy for investors to find the information they seek, and providing a summary of the key fund information investors are certain to want to know is crucial. Although particularly helpful to prospective investors, existing investors will also appreciate the reminder, saving them the work of having to review the offering documents to find relevant information. Standard key information covers the following.
   • Fund structure detail and entities: fund domicile, investment manager, investment advisor, fund manager.
   • Investment terms: management fee, performance fee, subscription dates and terms, minimum initial subscription size, subsequent subscription size, redemption dates and terms (e.g., redemption fees and redemption gate).
   • Service providers: administrator, custodian, auditor, legal counsel, clearing house.
   • Investor relations contact data: primary contact of the in-house marketing team or details of the TPM.
6. Competitive advantage overview. A fund should endeavour to catalogue its unique strengths to increase its appeal. These may cover aspects such as the fund manager's stellar reputation, the power of their analytical team and modelling resources, proprietary information-gathering capabilities, etc. The competitive advantage overview should briefly and succinctly highlight what makes a fund unique, what its ‘edge’ is. This section will be particularly important if the report recipients are prospective investors. As discussed, the monthly performance report should ideally be tailored to both groups, and this section should be more prominent and lengthy in the case of a prospective investor audience.

   The performance report should be brief. Depending on the level of detail, number of visuals, and age of the fund, the report should be anywhere between one and four pages long. Longer reports tend to be ineffective due to a lack of focus and excess detail. Although using standard word-processing software could be sufficient, the use of publishing software will ensure a more crisp and professional look and feel, particularly with regard to the layout and visuals. It is important to design the template so that it can be updated in a time-efficient manner. Investing up-front in the design and underlying models necessary to generate the performance metrics will ensure that the time required for monthly updating is minimized.

A final consideration around the monthly performance report is the format of communication. There are a number of delivery media available, and a fund should endeavour not only to have it available in all media but also to ensure the medium utilized matches the preferences of each investor. The most common form of communication is via e-mail, usually as an attached PDF to ensure the formatting is consistent. Some investors will also want it sent to them in hard copy, and others will prefer to access it online in a virtual data room set up for this purpose.

The Marketing Presentation

The marketing presentation is a document designed to give an overview of a fund, featuring information very similar to that covered in the monthly performance report. This presentation can also be designed to include all the monthly performance report information, excluding performance data, for the purposes of marketing a fund that has not yet launched. Pre-launch funds should treat their marketing presentation as the main marketing document up until launch, and prepare the monthly performance report prior to launch to ensure it is ready to go by the end of the first month of operation.

For pre-launch funds, the marketing presentation will be the main document sent to investors to elicit pre-launch investments. It will be the basis for their initial ‘selling’ interaction, usually sent prior to a face-to-face meeting or initial due diligence site visit.

For funds already in operation, the presentation may be sent to prospective investors as an initial selling interaction, and then complemented with the monthly performance report or ‘teaser’. Or it may be sent after the teaser as a way of elaborating on the information contained therein. The marketing team must make a call on whether the investor prefers brief concise information first, followed by a more in-depth treatment, or vice-versa.

A marketing presentation is usually written in slide format (using software such as Microsoft PowerPoint), and covers the same topics as the monthly performance report. It does, however, go into slightly more detail, and is more structured in its storyboard. A typical marketing presentation would be structured in the following manner (this example is for a fund that is already operating, the only difference from a pre-launch presentation being that the information is actual rather than planned).

1. Legal disclaimer. Legal language establishing the document as confidential and proprietary, clarifying the document complies with local regulation in terms of its function as material marketing financial investments, and reminding investors of the inherent risk of investing in investment funds.
2. Fund overview. Covering high-level strategy and coverage, launch date, and any major information about the fund itself.
3. Organizational structure. A detailed mapping out of the legal entities that make up the fund, explaining the ownership structure. A clear diagram is usually helpful.
4. Objectives of the fund. High-level summary of the return and volatility targets, main traded products and geographies, maximum capacity, and any other relevant targets of the fund such as non-correlation to equities or low leverage.
5. Team overview. Profile of the fund manager, main trader(s), and/or risk manager underlining previous experience and track record.
6. Competitive advantage. Overview of any distinguishing factors that give the fund an edge over the competition (analytical power, proprietary research, dedicated risk management team, etc.).
7. Investment environment. Background including market size, market dynamics, product universe, drivers of profitable opportunities, competitive environment, recent and future market and regulatory developments, major market trends, and future market outlook. Depending on how sophisticated the audience is, funds must tailor this to educate the audience to a greater or lesser degree. Energy commodity markets are relatively new to most investors and not as ubiquitous as equity markets, for example, hence funds should err on the side of explaining too much rather than too little.
8. Target portfolio allocation/typical positions and strategies. Breakdown of target portfolio by product (e.g., power vs. emissions), instrument (e.g., exchange cleared vs. OTC), or geographic market (e.g., Germany vs. Norway); indicative strategy weighting (e.g., directional vs. relative value).
9. Future plans. Overview of what the short- and medium-term plans are in terms of: AUM, additional intellectual capital, product or geographic coverage, return or volatility objectives, exchange memberships, etc.
10. Performance metrics. Return data; performance metrics such as standard deviation and Sharpe ratio; comparative benchmarks.
11. Investment terms. List of fund entities such as the fund domicile, investment manager, investment advisor, fund manager; investment terms such as the management fee, performance fee, subscription dates and terms, minimum initial and subsequent subscription, redemption dates and terms (redemption fees and gate); list of service providers such as the administrator, cash custodian, auditor, legal counsel, clearing house.
12. Contact information. Contact details of the primary contact of the in-house marketing team or details of the TPM.

Final Remarks

Even though performance is a requisite for attracting investors, it is not sufficient. The image of professionalism created by the marketing materials that attempt to present this performance in the most appealing and relevant way will be an immediate proxy for the professionalism of the trading operation. Even if only subconsciously, investors will judge the merits of the fund on the merits of its communication materials. They are usually the first reference point and interaction between a fund and an investor, and it is up to them to enable a second round of due diligence. It is critical to get beyond the first stage of contact, and achieving this is normally entirely up to the marketing documents. Funds must invest considerable time up-front and in the continuous updating and refinement of these materials. They lie at the heart of a successful investor acquisition.

One final note on data and information integrity. The importance of ensuring these figures are correctly calculated cannot be overemphasized. Not only do errors destroy credibility, they may lead to regulatory intervention or litigation if they are interpreted to be purposefully misleading or fraudulent. Accordingly, it generally makes sense to provide data to investors and potential investors in order for them to conduct their own analyses.