Alternative Investors

Hedge Fund Investor Types

Free Hedge Fund Video: The Hedge Fund Investor Pyramid

The following video was recorded for the Certified Hedge Fund Professional training program.  In this video, I share a unique tool that I have created to show the different investor types that hedge funds should be targeting in their marketing efforts.  If you are reading this via RSS or email, click here to watch the video.  

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Transcript for Hedge Fund Investors video:

Hello, this is Richard Wilson and welcome to this short video on Hedge Fund Investors. In this video I’m going to explain to you what types of investors hedge funds go after, why they focus on those types, how that totally changes as the hedge fund moves from a $1M to $30M to a $100M to a billion dollars plus, and why it’s really important to understand this concept if you’re working in the hedge fund industry, looking to raise capital or running your own hedge fund.

Surprisingly a few people in the industry go through formal hedge fund training and that is why lots of people can work in the industry for years without knowing some of these basic facts about how it operates. Now to start with, let’s look at the bottom of the pyramid. If you’re a hedge fund that has $100K to $10M in capital under management within your hedge fund there is very limited number of investors you can go after. And before I even start to label any of these please know that all of these types of investors are generalizations. The type of investors that you can go after in your country, in your state for you to have a hedge fund could be different.

So these are general guidelines, what types of investors hedge funds typically go after. It’s not set in stone and don’t take any action with hedge marketing or capital raising till you’ve spoken with somebody in your compliance department or an attorney that’s an expert on these issues. But now if you’re a hedge fund that manages a $100K to $10M in capital pretty much have limited options in the front of you. You can go after friends and family, small wealth management firms or some hedge fund seeders or fund to fund that seed small startup hedge fund managers or emerging managers as they’re called.

Really your options are limited here because people don’t trust that you’re going to be in business a year or two from now. They don’t trust that you have a talented team typically, that you don’t have a long enough track record, that your business really isn’t set up yet or profitable enough yet to survive long-term.

The second group here is $10M to $100M in assets. And these are often referred as emerging managers still and there’s a small percentage of “institutional investors” that will look at emerging managers. A very small percentage of institutional consultants, a very small percentage of fund to funds, some family offices and then your sweet spot in this range is really going after wealth management firms, very small family offices, high net worth individuals in a compliance approved way. Again, seed capital providers and really what you’re looking for here is people who want to take the bet on the manager which is not large yet. They don’t have hundreds and millions of dollars in capital but they can see your growth, they can see you’ve reinvested in your business, they see that you’re going in a good direction.

The next level up is when you get to $100M or more. This is when you start to be referred to as institutional quality. Many times up to $100M you’ll be called an emerging manager and many people if you’ll call them, they will almost, just hanging up right in your face if don’t have a $100M in capital or more because you’re not “institutional” enough for them. And this can get very frustrating to say the least for anyone trying to raise capital and many of you probably know exactly what I’m talking about. But when you get to this level, it opens a lot of doors for raising more capital. Do know that some institutional investors will still call you an emerging manager until you get to $250M or even $500M or more. But typically 80% of the market is calling you an institutional manager after you get to a $100M.

Now, when you get to this level you can market yourself to family offices full on to institutional consultants in most cases, to some pensions and foundations and endowments but many will require you to have those higher asset levels. And the top of the pyramid here is when you get to a billion dollars plus. I really have not heard of many allocations if any that require more than a billion dollars in capital. Even insurance plans, pension funds, endowments, foundations, ultra high net worths, the biggest single-family offices in the world -- typically if you have a billion dollars that’s a sustainable business plus some.

And it’s really about the institutional quality of your risk management procedures, the consistency of your invest process, the team you have in place. It’s more about everything else going on in your business rather than asset level at that point. Once you get past $500M, $800M, a billion dollars, the AUM issue instead of being the number one roadblock in your hedge business really is just a detail and it’s the other parts of your business that become center stage.

So I hope this short summary of what types of investors exists in the hedge fund marketing, who you can go after, what stages, who hedge fund managers are raising capital firm right now today at these different levels is very helpful and educational for you. Thanks and please join us again soon. It’s Richard Wilson and keep in touch.

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