By Matthew R. Beaton | July 22, 2017 (Article originally published on TheHill.com.)
The near-daily flogging of hedge funds in the media and in Washington can dampen even the most optimistic manager’s spirits, but, for the sake of their products’ survival, managers now must make a bold, uncomfortable move.
Recently, the industry took another blow. Bloomberg reported the Securities and Exchange Commission is reviewing how hedge funds handle shares bought during initial public offerings — another burden on a much-scrutinized industry.
Whether branded as “greedy,” chided about performance, or bad-mouthed by Warren Buffett, hedge fund managers have taken attacks from all sides. Their aloofness and unwillingness to defend themselves has done nothing to combat their battered public image. The barrage of abuse has badly tarnished the hedge fund brand, contributing to more than $100 billion in outflows and 1,057 funds liquidated in 2016.
Even first-quarter inflows and increased fund launches have done nothing to stem the tide of negative press, which last month highlighted minor dips in financial advisors’ use of hedge funds and a “crisis of confidence” facing the industry. That’s in addition to the usual barbs about fees, performance and tax status.
The bottom line is that these storylines are not going away. Thus, managers have a choice: Sit idle and take their lumps or mount a full-scale offensive.
With the fund closures, outflows and negative press, the industry can no longer remain silent. Hedge funds managers must engage the media to reshape their public image, explain their strategies and backstories and detail how they provide value to investors.
Since the financial crisis, high-dollar investors have overwhelmingly focused on safeguarding their assets. A global Knight Frank study released earlier this year found these investors most frequently cite wealth preservation (66 percent) as a top consideration in money management. That’s one thing hedge funds do well.
For too long, managers have let their value be defined by performance against the S&P 500 with no mention of downside protection. That must change. It is incumbent on managers to speak up and defend their strategies and explain how they fight volatility and protect clients’ wealth.
Last summer’s Brexit vote is one example of how hedge funds protect against politically-driven market volatility, which remains a concern as negotiations heat up between the United Kingdom and Brussels and the Trump turmoil continues in Washington.
Also, nine years after the financial crisis, hedge funds still have the best justification for their services. They suffered only about one-third of the losses the S&P 500 experienced during one of the most volatile periods in U.S. stock market history. Today’s current bull run cannot last forever, and hedge funds will again have a chance to prove their mettle.
Additionally, hedge funds not only outperform equities in recessions, but beat the U.S. bond market during periods of rising rates, as a recent a KKR study showed. With the Fed’s recent rate hike and another planned for later this year, managers have one more story to tout.
Hedge funds are written about as a monolith. At best, it’s an industry of personalities; at worst, one of villainous robber barons. Few in the press, much less the public, know about the innovative strategies managers employ to minimize risk, find alpha and maintain low correlations.
Sure, some major shops will get the profile treatment (often for the wrong reasons), but in general, there’s a fundamental disinterest in how managers invest. The strategies are too diverse, the tactics too nuanced, and the public’s demand for information too small for reporters to find and report on them all. Few managers want to give the public a peek behind the curtain.
But to change that, managers must dig into their histories, build their backstories and explain, through anecdotes, how and why they invest. They can look to Silicon Valley as a guide — tech giants’ dorm-room startup stories are known almost as well as their logos, and their sweeping visions transcend products and quarterly numbers.
It starts with an attitude shift. Managers must embrace openness with the media and take every opportunity to tout their strategies and defend their products.
This means informal phone calls with reporters, in-person meetings with editors and short-notice availability to comment on the market. It means proactively calling and emailing to comment on news events and market trends. It means publishing opinions and research in journals, trade publications and the mass media.
Managers must build an effective outreach plan, highlighting how they will differentiate themselves in the market, respond to bad hedge-fund press and highlight their own value. They can no longer count on mystique and exclusivity to drive a steady stream of clients to their doorsteps.
For instance, they could respond to the recent report on the SEC investigation into hedge funds’ IPO share routing by citing their role as a vital funding source for public offerings. That role is especially valuable since new SEC Chair Jay Clayton has repeatedly stated his desire to increase IPOs while leading the agency.
As fund-culling continues and negative news abounds, managers owe it to themselves and their clients to go on the offensive, reclaim their public images and enhance their brand equity. Their investing tenacity must be accompanied by public advocacy. The industry’s future may well depend on it.
Matthew R. Beaton leads the New York-based public relations firm Beaton PR, which works with law and financial services firms. He is a former financial journalist who has written for the Financial Times, among other news outlets.