How Managers Scale Their Fund to $100MM in AUM

12th March, 2021

Believe it or not, there is a “sweet spot” for hedge funds’ assets under management (AUM). Mid-range funds (between $100 million to $1 billion AUM) tend to perform better than their smaller and larger counterparts.

Returns for mid-range funds are around 13.7 percent per annum. Larger funds (anything over $1 billion) returned an average of 12.1 percent and funds under $100 million only returned an average of 11.5 percent. 

The reason? Mid-range funds hit the perfect balance between volatility (too high for small funds) and flexibility (not enough in large funds). 

Getting to $100 million AUM isn’t easy, though. Small hedge fund managers looking to scale up to the next tier face a lot of hard work, strategy, and relationship building. 

Let’s take a look at what the small managers need to do to take their fund to the next level. 

Fund Strategy & Mandate

By definition, hedge funds seek market-beating returns. As such, your strategy will often be one of the biggest motivating factors (if not the biggest) draws for investors. 

Many of these investors, especially high net worth individuals, are focused on capital preservation, especially during a market downturn. That means they often favor lower, more reliable returns rather than high upside potential with substantial risk. A good gauge for success is if your fund’s Sharpe ratio is high and its beta is low compared to historical market returns. 

Your underlying assets are likewise important to attracting the right investors. Different assets are going to appeal to different investors. 

For some, this could mean being sector-specific (focused on tech, healthcare, or trade, for example), as the investor’s familiarity in their respective vertical will give them confidence. Others may favor something more financially technical, such as bundled debts or intricate options packages. Still others may be attracted to something unique and niche, ranging from Madoff Claims to single malt Scotch to counting ships.

Ultimately, your strategy needs to be clear in your marketing materials and rock solid in your pitch to potential investors.

Experience & Pedigree

A 2019 study showed that two of the biggest confidence-boosters for hedge fund investors are pedigree and risk-taking experience. In many ways, these two metrics are one and the same.

The most successful fund managers and teams (both portfolio and executive management) are often those who came from the best firms, schools, and funds, where they had proper leadership positions and lengthy histories of success.

One strategy that can make your fund more compelling is to enhance your pedigree. To do this, you need to bring on “ringers”—new consultants and team members with impressive track records. If budget is a concern, you can often balance that out by offering these individuals more substantial commissions.  

Track record

To make it over the $100 million mark, it’s essential to show a strong track record. Any amateur trader can get lucky for a few months or a year. A true market wizard emerges when you can showcase a fund with strong, consistent returns over a multi-year period.

But what is a “good” return? Consider this: in 2019, the average hedge fund had a 6.96 percent ROI. Compared to the S&P 500, which went up 28.9 percent, and the Nasdaq Composite, which rose 35.2 percent, this ROI was, in fact, significantly below average.  

Meanwhile, a Yale-NYU Stern study showed that over six years, hedge funds returned 13.6 percent, compared to the S&P 500’s 16.5 percent. Worse yet, one in five funds closed over that same period. And given the other perks of investing in the stock market (higher liquidity, ease of access), what is the incentive for taking a gamble on hedge funds?

In short: market-beating returns. If hedge funds want to attract investment, the proof needs to be in the pudding. And if a manager has “skin in the game” (they’ve put their own capital into the fund as well), investors will likely take them more seriously. 

Investor relations

Relationships matter. Passing the $100 million mark isn’t just about having the best marketing materials and concepts—you need people to trust you. Pre-existing relationships between your management team and potential investors will make the process go much more quickly and smoothly.

Another benefit of bringing on a team with a strong pedigree is that they will be more likely to have prior investor relationships and can contribute to the fund’s AUM. 

While most investment money still comes from the institutional side, family offices and high net worth individuals should not be overlooked. It’s vital to have access to everything—from foreign sovereign wealth funds to newly minted startup millionaires—when setting up your fund. 

In order to be successful, you must also research and conduct due diligence on your potential investors. Find out what they have in their portfolios and where you can help them flesh out certain areas or diversify their current holdings.

There are also third-party placement agents and broker firms that specialize in raising capital for hedge funds. While this can be an effective route, it can also be expensive, both in terms of monthly retainers and success fees. 

Fundraising platforms

Fundraising online is the latest solution for raising capital for your hedge fund. But because so much of the fundraising process is relationship-driven, automated solutions simply don’t work. Any fundraising platform has to be secure and curated and based on trusted networking and verified access.

Furthermore, the platform must highlight your team’s pedigree and track record. This puts your credibility on the forefront, so potential investors can evaluate not only your history, but your fund’s strategy and success to date and make their decision with clarity.  

When we built PitchBoard, that’s exactly what we had in mind: human-centric, streamlined intentionality.   Looking for a laser-focused approach to scaling up your fund? PitchBoard simplifies the investor relations and research process, allowing you to concentrate your efforts on what’s important: refining your pitch and raising capital. 

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