Nov. 2014

A Lesson in Communications

A Headline from this Week: Hedge Funds Underperform S&P 500

As I read recent headlines and delve deeper into the articles, I assume that I am reading a satire, perhaps written by Andy Borowitz or Stephen Colbert – but I’m not. Oh, and I’m reading industry publications, not the mainstream financial press. They might be forgiven, either for ignorance or their desire for ad selling headlines.

Let’s all say it out loud: Alternative investments are not traditional investments. Perhaps that is why they’re called “Alts!” Hedge Funds should get out in front of this issue and not let anyone define them except themselves. This is Marketing 101.

To this end, the Hedge Fund industry can use some real positive schooling in positioning and messaging. Their bad rap is unwarranted, misguided and misplaced.

The position of Hedge Funds should be that their strategies invest to make money on assets that are rising (longs) and ones that are falling (shorts). This investing for protection is among their prime positioning. Hedge Funds are not intended to mirror traditional investments, nor do they have the basic structure to do so, so why compare them? Yes, someone is bound to comment that some funds do, but the vast majority of the 10,000 or so funds in the U.S. invest with some moniker of protection.

Hedge Funds have the mandate to invest in both sides simultaneously. Because each of their selected asset groups rarely move in the same direction, they are considered hedged. Most asset classes over 12 – 60 month periods are directional. Hedge Funds are generally designed (I am not writing a dissertation on risk management, volatility and correlation) to protect against large losses of principal and participate in the primary direction of the strategy. Strong managers can make money on both their longs and shorts, but they are rare, and few can perform this over time or consistently.

Most Hedge Funds are not equity substitutes and are not and should not be benchmarked against the S&P 500. Slow and steady are the monikers of many solid strategies providing lowering volatility to the asset class in which they base their strategy; stock, bonds, commodities, currencies, etc.

The messaging for many Hedge Funds should be about making money, having little to do with broad-based traditional benchmarks. This is called correlation. Low correlation is a selling point of Hedge Funds. Many backers of diversification should appreciate Hedge Funds’ low correlation to other asset classes.

So let’s recap. Hedge Funds are hedged, they do not move up and down with broad markets. Additionally, they have many additional positive attributes, some of which are only truly appreciated in volatile or down markets, and in times of fear, when hedging one’s investments is the most intuitive.

Then why do smart managers allow the media to inform accredited and qualified investors, financial advisors, consultants and institutional asset owners how Hedge Funds are performing compared to the S&P 500?

Many funds, especially large ones, laugh this off. Their institutional assets keep growing despite any bad press, Madoff or SAC scandal.

The long game says large funds should care. Also new funds, emerging managers should care. Consultants that have to educate boards and legislators are making judgments. Big growth is being made through liquid alt Mutual Funds, the ultimate public and financial advisor vehicle.

Managers are learning that positioning and messaging are the key to mass distribution. When it comes to sales, those “outdated” Mutual Fund companies aren’t such slouches after all are they? With modern marketing and electronic distribution, they can be beaten at their own game, as they too are locked into bad legacy habits.

Every day is a new opportunity to take control of your own messaging.


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