A critical component of successfully cultivating relationships is first identifying who your relationship ought to be cultivated with. The first of six steps in the 6 “I”s of Relationship Cultivation involves doing just that. It is: “Identify & Qualify”. This step allows you to identify the potential and current clients that have the potential and ability to be clients. It does not require any contact with clients, but rather involves the following steps:

1. Market Research: Potential Client Identification
2. Internal Knowledge Assessment
3. Due Diligence: Qualification

The three areas above will help you to define the candidates that will potentially benefit from what you have to offer in the way of services and products, and that will benefit you and the company by becoming a customer/buyer. Extensive client identification should be conducted before partaking in the proceeding 5 I’s; it may be helpful to use past success factors to help identify new leads, but do take into account the changed market (as it will have inadvertently changed since your last “Identify & Qualify” session), the changed worldviews of your clients, and the changes that have taken place internally, as these factors will all affect the way customers perceive you and your offerings.

Be sure to check back tomorrow for the second “I”: Introduce & Interact

Private Equity Skills

What Skills Students Should Learn for Private Equity

I’ve been traveling for the last three weeks and during the flights I have been going through some white papers that I’d been meaning to read.  One particularly interesting paper is by a professor at Stetson University titled “Understanding the Skills Needed for Careers in Private Equity Investing.”  The research identifies a major disconnect between general finance education and that needed for investing in private equity.

Although many professionals receive a general business school education and work one or two years at an investment bank or other finance firm, it would be great if an MBA included a more focused study on private equity to prepare graduates for a very unique field.  There are signs of a shift toward educating students on private equity is the Tuck School of Business’s Center for Private Equity and Entrepreneurship as well as the University of North Carolina’s Kenan-Flagler Private Equity Fund which is largely run by students.  I hope that more research is done to show how students and business schools would benefit from a curriculum with a strong focus on private equity.

It’s crucial that students at least have a basic understanding of how to value companies, structure a deal, complete accurate due diligence, manage a portfolio and negotiate with investors and keep them satisfied.  The price for on-the-job training for a venture capitalist could be millions of dollars from your investors, so it’s important to have a curriculum that addresses specific skills necessary for working in private equity.  The skills that private equity professionals should have beyond the existing MBA and finance degree curriculum are:

1. Being able to realistically value businesses in an illiquid start-up context 
2. Contractually structuring the investment
3. Maintaining an effective personal network to both ensure adequate deal flow, and also assist  portfolio companies in securing critical resources
4. Possess the negotiating skills associated with both purchasing and selling an investment
5. Be able to coordinating thorough and effective due diligence

If you have not developed these skills or your business school has not addressed these needs, the author prescribes ways to improve these crucial areas:

1. Do not rely on the “general business requirements” to meet these skills.  
2. Some of these skills are process skills, meaning that they are developed by practice – not merely through understanding the process.   
3. Due diligence is on virtually no one’s curriculum.  There are great books available and free resources online to give you at least a surface knowledge of this area. 
4. A course in private equity investing can be demonstrated to accomplish the purposes of the business capstone class, and might be offered in lieu of Strategic Management, for example.

To read the full white paper, see here.

See our private equity career guide for more information on what you need to succeed in private equity

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Fund of Funds Madoff

Funds of Hedge Funds After Bernie Madoff

Funds of hedge funds are trying to remake their image after Bernard Madoff‘s massive ponzi scheme. Investors have lost confidence in the fund of hedge funds industry from factors including poor returns, a deep recession and high profile scandals like Madoff’s. Another factor that may be turning investors away is the common extra level of fess fund of hedge funds charge but many of these funds are changing their methods to attract investors.

Investors withdrew at least $150 billion from fund of funds in 2008 and 2009 leaving these funds with an up-hill battle to reclaim that lost capital. To get investors back without having to drastically cut fees, fund of hedge funds are now replacing employees, heightening risk monitoring or giving investors greater liquidity.

This overhaul is particularly noticeable in the funds that invested with Madoff. Managers are replacing the people who should have foreseen the scheme and bolstering the existing risk management team. In cases when the decision to invest with Madoff was debated in the firm, the person(s) most responsible are being isolated as the sole reason that the fund of funds invested with Madoff.

This strategy of remaking their image and boosting investor confidence may be working. According to S&P, the fund of funds industry is having its first net inflows in over a year.

While the additional fees are not as high as those on the underlying funds, they nevertheless represent an extra cost, and the very need for funds of funds is now being questioned as some institutions consider cutting out the middle man. “Pension funds’ hedge fund databases are getting sufficiently large that you can replicate a fund of funds by buying 50-to-60 funds,” said Nick Bullman, managing partner at Bullman Investment Management.

Some firms have responded by developing a range of so-called managed accounts — tailored and segregated portfolios for individual clients — which allows them to sell when they want and which are hard for investors to reproduce.

London-based Permal, which runs around $19 billion in fund of funds assets, has expanded its range of managed accounts, including some tailored mandates, between which it can move money more quickly.

“Specialist groups and customized products could do quite well. If you focus solely on a customized or country specific product you can justify excess margins,” said Bullman. “The idea of acting as a gatekeeper to … funds doesn’t work now.” Source

Learn more about the Bernard Madoff Scandal and Hedge Funds here.

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Please see Hedge Fund Recruiting.com for a new open position just posted. Cambridge Associates is hiring an operational due diligence analyst. Learn more at HedgeFundRecruiting.com.

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Hedge Fund Growth Insights

I went out to a Moroccan restaurant last night with a few investors and business professionals. The general sentiment on their side of the table was that “hedge funds are dead.” I disagreed, the number of fund startups, the need for more skilled asset management and the regulation of banks who traditionally held prop desks all point in favor of the hedge fund industry.

Embedded below is a recent video on the current hedge fund industry. The videos view of the industry is line with my own – I believe that the opportunities within the industry are greater than ever before. Assets are at low levels and many investors have very significant allocations waiting for the right managers and timing to allocate those funds. A recent survey showed that many institutional investors are wanting to soon re-allocate back into the hedge fund industry.

The video also confirms that the myth of pension funds and endowments moving away from hedge funds is false. Many endowments and foundations are not only going back to hedge funds, but they are looking to increase allocations.

Tags: Hedge Funds Are Dead, hedge fund, hedge funds, alternative investments, private equity, hedge fund performance, due diligence, investing

Hedge Fund Growth Insights

I went out to a Moroccan restaurant last night with a few investors and business professionals. The general sentiment on their side of the table was that “hedge funds are dead.” I disagreed, the number of fund startups, the need for more skilled asset management and the regulation of banks who traditionally held prop desks all point in favor of the hedge fund industry.

Embedded below is a recent video on the current hedge fund industry. The videos view of the industry is line with my own – I believe that the opportunities within the industry are greater than ever before. Assets are at low levels and many investors have very significant allocations waiting for the right managers and timing to allocate those funds. A recent survey showed that many institutional investors are wanting to soon re-allocate back into the hedge fund industry.

The video also confirms that the myth of pension funds and endowments moving away from hedge funds is false. Many endowments and foundations are not only going back to hedge funds, but they are looking to increase allocations.

Tags: Hedge Funds Are Dead, hedge fund, hedge funds, alternative investments, private equity, hedge fund performance, due diligence, investing

Hedge Fund Growth Insights

I went out to a Moroccan restaurant last night with a few investors and business professionals. The general sentiment on their side of the table was that “hedge funds are dead.” I disagreed, the number of fund startups, the need for more skilled asset management and the regulation of banks who traditionally held prop desks all point in favor of the hedge fund industry.

Embedded below is a recent video on the current hedge fund industry. The videos view of the industry is line with my own – I believe that the opportunities within the industry are greater than ever before. Assets are at low levels and many investors have very significant allocations waiting for the right managers and timing to allocate those funds. A recent survey showed that many institutional investors are wanting to soon re-allocate back into the hedge fund industry.

The video also confirms that the myth of pension funds and endowments moving away from hedge funds is false. Many endowments and foundations are not only going back to hedge funds, but they are looking to increase allocations. If you are one of the 5,000+ professionals viewing this article through our daily Hedge Fund Newsletter please click here to view the embedded video below.

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Qualitative Due Diligence

Qualitative Hedge Fund Due Diligence

Here is a short article excerpt from a piece discussing the growing importance of due diligence on more of a qualitative rather than quantitative level.

The new hedge fund reality places even greater emphasis on due diligence, but it doesn’t mean that investors should start ignoring or abandoning the alternative asset class.

This was part of the message presented to investors today at the Managed Funds Association conference in Key Biscayne, Fla., by Meredith Jones, managing director of PerTrac Financial Solutions LLC of New York.

“I think quantitative analysis tools are great, but without critical thinking skills, it’s just math,” she said. “Qualitative analysis is clearly more important than it’s ever been.” source

Read over 20 additional articles on due diligence within our Hedge Fund Due Diligence Guide.

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Due Diligence on Hedge Funds

Conducting Due Diligence on Hedge Funds

(HedgeFundBlogger.com) No set of rules can guarantee that you do not end up with a mini-Madoff at some point, but learning about best practices in the industry, working with institutional consultants, and working with a qualified wealth manager or family office can greatly reduce the chances. There is a small blog I sometimes read written private equity and hedge fund investors. Recently they have been discussing fraud in the industry and the rules they follow to avoid such groups. Below is part of an article released this weekend on what to do while looking at a hedge fund investment:
_____________________

1. Rule number 1, never invest in a manager solely on a referral without doing some basic homework NO MATTER HOW MUCH YOU TRUST OR RESPECT THE REFERRAL PERSON– the follow monthly should take less then an hour total and a monthly follow up less then 30 minutes per month.

2. Rule number 2, Meet your prospective manager at his office and get a complete review of his strategy – take reasonable notes and ask at least the following questions:

a. How do you make money? What makes your strategy special or different from other strategies? How much leverage do you use and how important is leverage to your strategy (remember leverage isn’t a bad thing if the exposure to the leverage as a function of time is small relative to the leverage)

b. Look at the office, how many employees are there, who is helping the manager, meet other important people involved in the fund and specifically ask how long they have known the manager and what there basic role is in the fund.

c. Who custody’s your hedge funds assets? What prime broker does he use? Who does the monthly return accounting? Will he give you a contact at the prime broker and authorize the prime broker and or monthly accountant to disclose basic information about the fund; specifically, the funds assets (ask this after you have asked the assets under management). Walk away if the manager does his own accounting internally or if he custody’s funds internally for no good reason (a real estate fund for example doesn’t use a prime broker, but they will use a bank to hold the funds – call the bank and investigate his reputation with that bank).

d. Ask the manager for personal references not from investors but from people he has previously worked at in other fund management capacities. Call these references and verify there roles match the roles described to you by the manager.

e. Ask your manager under what conditions he would expect to make money and under what conditions he would expect to lose it – do not accept that he can make money in all markets – no strategy does this – require a better answer.

f.Review the terms of the investment, what are the liquidity terms, is there a gate provision in the documents? What are the risks. Read the offering documents. If there is ANYTHING you are uncomfortable with, walk away.

3. If you do not understand the strategy in even a basic way, then get a third party to review it or simply walk away. read more…

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Tags: Conducting Hedge Fund Due Diligence, Due Diligence, Hedge Fund Due Diligence research, Evaluating Hedge Fund Managers, Hedge Fund Due Diligence Tips, investments

Financial Advisor Marketing

Financial Advisor Marketing Differences Q & A

Today I received this question from a New York based hedge fund marketer.

Question:When marketing to financial advisors for your hedge fund, what necessary steps do you need to take dealing with these guys? Is it any different that dealing with family offices?

Answer: Marketing to financial advisors is much different than marketing to single and multi-family offices. Here are the main differences between the two that I have noticed:

• Family ffices have more established due diligence procedures, often involving consultants or internal analysts which do nothing but look at hedge funds or alternative investment products.
• Financial advisors have lower minimum asset levels for what they will consider investing. 90% of family offices only seriously consider investing in hedge funds with at least $75M-$100M, and many require $250-$300M or even $1B in assets under management.
• Family offices are more tight lipped. It will take more effort to develop a relationship, meet in person and get clear feedback on why or why a hedge fund is a good fit for what they are looking for.
• Family offices are harder to identify in the first place. Financial advisors are easier to find, there are more of them and they advertise more openly. Some family offices advertise but many stay below the radar and some purposefully don’t even have a website.
• While family offices service to high net worth investors almost exclusively many financial advisors work with a broad spectrum of client types – this might require more caution by them and your fund in marketing products to them. It might also mean sorting through more financial advisors to find one with several HNW clients.
• In my experience financial advisors seem much more sensitive and motivated by how they will earn a commission or income from the transaction whereas many family offices charge rich enough fees that this is less of an issue.
• While some financial advisors may take 16-24 months to really get “on board” with a relevant hedge fund manager, understand your investment process and possibly invest most will come to terms a bit before then. Family offices on the other hand often take 18-24 months just to complete their due diligence and committee meetings, it is a very long sales process.
• Both family offices and financial advisors require genuine relationship-building efforts and tenacity
• From a legal standpoint there may be other precautions your fund should take but I am not a legal expert so I can’t provide any guidance within that space.

I recently published a blog post which provided more tips on marketing hedge funds to financial advisors here: Marketing Hedge Funds to Financial Advisors and I have 30 additional articles within the Hedge Fund Marketing Guide section of my blog.

Finally, I run small websites on both third party marketing and family offices which may be of use.

- Richard

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Due Diligence Process

Due Diligence Process Tips by Experts

A panel of hedge fund industry experts gathered at Bloomberg to discuss hedge fund due diligence and educate hedge fund investors on lesser-known difficulties. The discussion emphasizes that there is inherent risk involved in hedge funds, but due diligence can minimize this risk. Barry A. Wintner (director of research at Asset Alliance) says that investors must understand the volatility and danger to avoid worst-case scenarios.

Wintner advocates for choosing seasoned hedge fund managers and thoroughly examining the manager’s past strategies and experiences. He lists important questions to ask when considering a hedge fund manager. The panel discusses operations due diligence, an area that many investors neglect but are critical for hedge fund investors. Another aspect discussed is a thorough method of conducting a background check.

This resource outlines often overlooked due diligence aspects and gives simple tips to correct this. Click here now to view this resource.

- Richard

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Analyst & Due Diligence Jobs

Please see below for open analyst and due diligence jobs within the hedge fund industry:

Position #1: Operational Due Diligence Analyst (New York Tri-State Area)
A New York Tri-State area hedge fund of fund specializing in global investments is seeking an Operational Due Diligence Analyst to assess operational risks and identify potential control weaknesses of hedge funds and private equity funds that the firm intends to invest in. The position requires a good understanding of hedge fund and private equity fund structures, operational processes, controls and service providers.

• Job Description: Research, analyze, and document the operational process and controls of investment advisors. Coordinate, prepare, and conduct due diligence site visits/calls with potential and existing investment advisors to evaluate their processes, policies, procedures and controls. Coordinate problem resolution with colleagues in related functional disciplines including Legal, Compliance and Product Management. Continuously benchmark and upgrade our processes to adjust for industry developments and improvements in best-practices
  
• Required Skills: 3-5 years of Alternative Investment audit experience from BIG 4 or current due diligence experience from a FOF or Hedge Fund
• Compensation: Base $90K-$110K before bonus

Apply: If you meet the required experience and skills for this position and would like to apply please send your resume and relevant background details to Ross Weil at RWeil@BOCStaffing.com

Open Position #2: Senior Retail Analyst – The Senior Retail Analyst will be working with the senior team to design and build our research product in retail and restaurants.

This is a unique opportunity to help craft a sector and its associated offerings. We have access to and are currently vetting several proprietary databases and information sources that have proven extremely valuable in providing transparency into the fundamental drivers for many companies in the sector. Our highly differentiated approach, which triangulates across multiple proprietary data sets and other information, will allow our Retail team to provide insight that no other firm can match.

• Responsibilities: Working with research and development and business development teams to craft a world-class product offering. Building out a research team for the retail sector, including hiring associates. Aggressively marketing the research product, including traveling regularly with Sales for client and prospect visits, talking intermittently to printed press and TV, and overseeing periodic industry expert dinners with clients. Working with the Director of Business Development to identify new unique proprietary sources of data in the Technology space that will allow us to triangulate our research and expand our coverage
• Requirements: Minimum of 3 years covering retail and/or restaurant names on either the buy-side or the sell-side. Comfort with and passion for data. Outstanding verbal and communication skills. Sales-oriented mentality. Bachelor’s degree (MBA/CFA and/or advanced engineering degree preferable). Outstanding academic record from top institution(s). Minimum 4 years’ experience either on the buy-side or the sell-side or possibly from the industry for a particularly outstanding candidate.

Apply: If you meet the required experience and skills for this position and would like to apply please send your resume and relevant background details to Eric Krause at ersusgroup@comcast.net

Please email Richard@HedgeFundGroup.org to add your open position here now.

Not interested in these positions but interested in looking at other open hedge fund jobs? Please see HedgeFundBlogger.com’s Hedge Fund Job Listings page.

- Richard

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Investment Due Diligence

Investment Due Diligence Resource

Last month someone sent me this resource on due diligence. Fortis offers this guide to investment due diligence which goes beyond the initial selection process. The article focuses primarily on identifying potential problems by maintaining contact with hedge fund managers and thoroughly looking into the operations. Although much can be learned from traditional due diligence, Fortis suggests simply talking with the staff and manager. They suggest that a practical understanding of psychology helps detect the underlying factors that could effect a manager’s performance. This article advocates a close relationship with the manager, adding a level of transparency for the investor and includes helpful tips for building this relationship.

Here is the full resource: Fortis Due Diligence Article

- Richard

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Hedge Fund Operational Risk

Hedge Funds – Operation Risk Assessments

As the hedge fund industry. matures and manages more assets, investors have developed more thorough due diligence practices. In this white paper cited below investors are warned to scrutinize the operational structure of a fund, as the author believes that some hedge funds are poorly managed with a small staff relative to the massive assets under management.

This white paper recommends a rigorous operational due diligence review that covers the manager’s overall fund structure, back office structure, valuation and independent oversight. The guide looks at several key considerations for hedge fund investors: the experience of the operations personnel, compliance, internal operations, portfolio pricing and the quality of the service providers. There is good news on operational infrastructure, in that middle office functionality has improved with the addition of more major outsourcing providers. Yet a thorough operational due diligence review is still very necessary for hedge fund investors. I thought this resource might be useful to many fund of fund professionals and investors.

Resource: Whitepaper on Hedge Fund Operational Risk & Transparency

- Richard

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Hedge Fund Fraud

Hedge Fund Fraud Due Diligence

I recently found an article that talks about hedge fund fraud and how it can be very difficult to detect in hedge funds because of their secrecy, but rigorous due diligence can prevent some types of fraud. This article mentions that Although audits are important, they may be occur too late. A key requirement for many investors is for the hedge fund manager to open their investments for review. This article suggests that if the hedge fund is unwilling then do not give it your investment. A hedge fund investor should make sure that a thorough operations review is conducted, including fees. This review can protect investors from shouldering costs that should be paid for through the management fee.

This article also suggests that those who have an investment adviser should ask if there adviser has an operations review system. Many investment advisers do not go beyond the initial due diligence when selecting a hedge fund. With the industry evolving, due diligence must too through an independent operational review that obtains information from not just the manager but also the prime broker’s or fund’s custodian. This guide includes the important data that an independent operational review should cover. Improving operational due diligence should in theory at least help investors avoid investing with a fraudulent hedge fund manager.

Resource: Fraud Article

- Richard

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FINRA Broker Check

FINRA Broker Background Check Tool

Completing due diligence on a registered broker in the hedge fund industry?

FINRA offers investors a free online background check service of FINRA-registered securities firms and brokers. The FINRA BrokerCheck includes search capabilities for both a broker and brokerage firm, online delivery of the report, an explanation to help investors understand the information provided, and links to additional resources. BrokerCheck provides background information on an estimated 677,00 currently registered brokers and almost 5,000 currently registered securities firms. Also listed is an online collection of information about Investment Adviser firms that are regulated by the Securities and Exchange Commission.

- Richard

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Cash Management

Cash Management Due Diligence Check

I recently found an article on conducting a cash management based hedge fund due diligence check. The relatively few major scandals involving hedge funds have led many investors to call for greater transparency and impose stronger due diligence. Investors hoping to reduce the chance of fraud or theft view cash management as a critical aspect of due diligence. They want to know where the money is going, how it is protected and ensure accountability for their investment. The focus on cash management has created a push for accountability and separation of duties so that one entity does not have too much responsibility.

This article believes that hedge fund managers can expect to answer more rigorous cash management questions involving the basics, how the money is invested, reporting and reconciliation, and subscription and redemptions. After numerous hedge fund frauds and thefts, how the fund manages an investor’s money has become a priority in due diligence. Managers can view this article as a method for assessing weaknesses and investors can use this to improve due diligence and protect their investment from poor cash management.

Resource: Due Diligence Check – Cash Holdings

- Richard

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