Introduction to Fund Strategy
Fund strategy refers to the planning and research before launching a fund to ensure maximum chances of its success in the future. Success here is usually defined as better returns for investors as compared to their peers.
A fund strategy is attempted in multiple steps to ensure all moving parts work together to bring in the desired results. Here are the major steps that are required to acing a fund strategy and marketing effort.
Type of the fund
It is usually no brainer when a fund starts its operations. The type of the fund depends on the experience of the founding partners. Personnel who are most experienced in Hedge funds would usually go for starting a hedge fund. When a bigger fund launches a separate arm or ventures out in a different domain, then there is some work involved in finalizing the type of fund to go for.
While deciding the type of the proposed fund, the following parameters play an important role:
What investors want: The key here is meeting investor expectations. Some investors limit themselves to returns generated while others may get into the details like the social impact that the planned investments make. Big investors usually budget for investments like ESG, impact, or social investments. If a proposed fund has a big investor who is ready to support and has specific needs, it’s better to align the fund strategy with that of the investor needs. This is all the more important if these investors are early or only investors.
What generate returns: Many times fund managers also need to check the track record in terms of returns for various other types of funds and make a compelling case to go for a specific type of the fund
How fast your investors need returns: While a Hedge fund may start showing returns as soon as stock markets run high, A Private Equity or a venture capital fund may take even a decade to show returns. Understanding the expectations of investors in terms of returns period horizon is the key
Team’s capability: Here the natural talent and experience of fund partners come into play. If partners who have an illustrious career in hedge fund management come together, it is obvious that they should start a hedge fund. It will also be easier to raise funds in that case by showcasing the experience of founding partners to investors
Fund Strategy
Here are the major type of funds that could be thought of at the first stage and the further fund strategy accordingly required
Major Steps Required Towards Fund Strategy
Hedge Funds: This fund invests in listed stocks primarily. Long short equity is the most popular option. Usually, funds go for more long calls than short ones. Here, Hedge Fund Strategy needs to identify geography focus, industry focus, long-short calls ratio, stock strategy (blue-chip, value-based, etc), holding horizon (long term, short term, etc), trading norms (AI, manual, process, etc), the economic rationale (macro-based, etc.,). Sometimes an experienced founding team understands what makes sense to them as per their experience but still a fresh eyes’ perspective on where the opportunity is, going to help. This requires massive data and information collection efforts to understand where the markets are headed from the returns’ perspective. Hedge fund strategy types are numerous and careful evaluation is required along with Hedge Fund strategy outlook.
Private Equity Fund: This fund invests in private companies and sometimes in public companies and takes substantial stock positions in their investments. The idea is to have a significant portion of the stock holding to impact the business decisions. Skills required here are way different from what is required in establishing a hedge fund. Hedge Fund requires more financial skills whereas managing a Private Equity fund requires more company operational skills. Private Equity fund strategy here concerns the industry focus, geography focus, stake (controlling, minority, etc.), investment focus (late stage, public companies, family-owned businesses, etc.). Along with the experience of founding partners, a great deal of research on returns generated by various types of PE funds help go a long way. This fine-tunes the fund management strategy.
Venture Capital Funds: Quite like Private Equity, but the venture capital fund is smaller in size and places relatively smaller bets on early-stage private companies. This form of investing is high risk and high returns that bet aggressively on companies that may become big in the future. Venture Capital fund strategy identifies geographic focus, industry focus, stakes (minority, control), investments focus (seed, early-stage, late-stage, etc.) Here again apart from the experience of founding partners, research on emerging trends help go a long way
Real Estate or Infrastructure Funds: These funds invest in real estate based assets to generate regular returns over a long period. This form of investing carries lower risk and are comparatively more stable. Upside returns are also moderate as compared to other forms of investing. A Real Estate fund strategy would require to finalize the asset class (public infrastructure, hotels, low-cost housing, self-storage, etc.), geographic focus, Government incentives behind some forms of investing, potential returns, etc.
Crypto-based funds: This is a relatively smaller and new development. The fund manager invests in different forms of cryptocurrencies as an asset class. Phenomenal returns from Bitcoin has given a boost to this category. Here the cryptocurrency fund strategy development would be around the specific cryptocurrency that should be invested in and how to minimize the brokerages being paid for maximum returns
Family Office or Fund of Funds: This is for an investor himself. It usually works in a combination of parking money in various funds and doing direct investments as well. Here the strategy would be to find the best asset manager or performing funds, finding great direct investment or co-investing opportunities, and regularly scanning the environment for tracking the emerging investment class.
Bond Funds: There are debt funds and funds that are based on returns from sovereign and corporate bonds. These are bond funds. Here the strategy is about finding the bonds that produce the best returns with comparably lower risks. Bond fund allocation strategy also needs to be identified in this case.
Others: There are multiple other funds that emerge due to arbitrage opportunities created by policy changes by Governments. Assessing the fund strategy in detail along with statutory requirements is the imperative of fund research here
Fund Raising and Fund Marketing
Fund Raising is the most critical step in the lifecycle of a fund. Fundraising efforts primarily end up deciding the fate of the fund singlehandedly.
Steps Required for a Successful Fund Raising Strategy
Seed funding is received by self, family, friends, or the personal network of the founders. Once the seed funding is secured, a wider reach out to an international or broad set of investors is required. This reach-out is usually done over emails, social media, investor websites, fundraising platforms, and several other channels. There are many databases and information services providers that deal with the contact information of investors.
Hedge Fund Marketing strategy decides whether the fund will be able to garner the requisite funds. A good Hedge Fund marketing plan suggests the type of investors to be reached out to.
Reach out leads to investors showing interest in a fund and then set up meetings. Once the meeting is set up, Partners are expected to present their ideas about their style of investing and further details about the fund. Bigger funds rely on international fund marketing for the fundraise
Another critical step is to prepare the fundraising documents like pitch deck, Private Placement Memorandums, Confidential Information Memorandums, 1 pager, Teasers, hedge fund marketing documents, hedge fund marketing deck, fund marketing materials, and details about the previous experience and investments by the founding team.
Fund Administration and Investor Relations
Once the money has been raised, of-course the fund gets busy in operations which relates to parking the money in a way that generates superior and safe returns for its investors. Apart from that activities related to the fund administration are taken up. It’s about accounting, handling trade exceptions, keeping books, calculating taxes for investors, and several other tasks that show, investors that their money is in safe hands. This brings further investors to the fund. The investment strategy for the fund is implemented in this stage. A fund with a successful track record of execution attracts far more investors than a fund with no considerable experience or track record.
Launching bigger follow-on funds and funding rounds
Once the fund is successful it branches out in the same or different space and raises more money often at terms that are more favorable to the fund manager than it was while raising the maiden fund.
Magistral Consulting provides in the space of Hedge Funds, Private Equity, Venture Capital, Real Estate, and Family offices with Fund Strategy and Fund Marketing services. It has successful fundraising strategy templates that work across the type of funds. Please drop an inquiry here.
About Magistral
Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research
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About the Author
The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.