In this challenging year for the hedge fund industry, the durability of small- to mid-sized funds comes into focus. While many larger funds can withstand ongoing market uncertainty, emerging managers face a unique set of limitations.
Considerable amounts of new money continue to flow to fund managers at decent levels, but beneficiaries of those funds are increasingly narrow, whereby the top 5% of the world's hedge fund managers are expected to take 80-90% of investor inflows in 2023 (i). The domination of this small group of funds has squeezed the total pool of hedge funds to its smallest size since 2009.
A survey of hedge fund managers found that more than 80% of emerging managers said capital raising was their biggest challenge. Almost half said that attracting investor inflows is tougher today than it was a year ago (ii). This continued pattern calls for bespoke capital introduction solutions designed to help the other 95% of funds succeed.
At Clear Street, exploring new ways to support our clients is an ongoing part of our strategy – whether through operational support, enhanced reporting, or risk management tools. To that end, our capital introduction team takes a tailored approach to each client, regardless of size or where they are in their life cycle.
The team primarily focuses on family offices, with an expansive network across all investor types. Clear Street takes a consultative approach, assisting with branding, marketing materials, roadshow planning, and hosting smaller, curated events focused on connecting like-minded individuals.
Blaine Hurty, Clear Street’s Managing Director and Head of Capital Introduction, told us more about the state of the capital introduction market, the ingredients for top-notch service, and Clear Street’s solution.
Capital introduction is a service provided by investment banks and prime brokers to hedge fund managers and other asset managers. At its core, capital introduction functions facilitate introductions between these managers and potential investors, such as institutions, family offices, and high-net-worth individuals. The goal is to help managers meet investors.
Initially, capital introduction at banks started as small, informal, but impactful networking events, where the bank would introduce a manager to their network of institutional investors. These events allowed fund managers to showcase their strategies and performance to potential investors. Over time, capital introduction evolved into a more significant and structured part of a prime broker’s business and prime sales process. It now includes various forms of investor introductions, conferences, forums, and an extensive network of events focused on different asset classes, geographies, and fund strategies.
Today, independent third-party groups play a major role in the hedge fund industry. Large marketing firms and banks put on huge industry conferences that serve what is now the format for capital introduction. It’s hard to know how effective these events are for managers, and, in some cases, they may only serve the interest of the conference provider, not the managers or the investors.
At Clear Street, I’m trying to take Capital Introduction back to its origins by focusing on smaller, more informal, impactful interactions. My team and I are attempting to foster deeper relationships with our managers and our network of investors. We want to have a greater impact on our managers’ businesses.
We’re taking a rifle approach with a curated list of investors for each of our managers rather than a shotgun approach like many of our peers. We’re fostering personal relationships, emphasizing transparency, and simplifying the process of connecting investors with managers.
No question raising assets is challenging, and capital introduction is difficult. The state of capital introduction today is shaped by large industry conferences and big emerging manager events. The dominance of these events has deteriorated the quality of what was once a high-quality service provided to clients.
Navigating this landscape requires adaptability, innovation, and a focus on core principles. At Clear Street, we’re trying to add value to our clients by bringing relationship-building to the forefront of everything we’re doing.
There is no one-size-fits-all elegant, efficient solution for capital introduction. Larger financial institutions, third-party marketing groups, and dedicated conference providers have tried to increase efficiency by running large-scale events rather than focusing on tailored outreach. This leaves managers with the difficult task of trying to differentiate themselves at a huge conference, in a room full of managers having 1-on-1 speed dating type meetings, or navigating a web-based scheduler with hundreds or even thousands of other funds.
Money managers do two things that matter most: 1) investment performance (on an absolute and relative basis) and 2) raise and retain capital. We recognize that time is a precious resource. If managers are spending time reaching out to investors who aren’t interested, meeting with people who need to fill a quota of meetings for a conference (as mandated by the conference), parties, etc., then they can’t tune in to what’s important - growing their business.
It’s much more effective to have fewer conversations with the right allocators to better understand their specific needs. My team spends most of our time engaging with investors. Therefore, it is essential to have a seasoned team with deep-rooted investor relationships and the ability to build new ones. It is also crucial to spend face-to-face time with these investors—we see traveling as an essential component of a stellar capital introduction team and product.
We strive to be an extension of an investor’s research team. Our goal is to understand their needs, investment mandate, and investment criteria in order to identify investment opportunities that may be a fit.
At Clear Street, we’re trying to peel capital introduction away from pure efficiency and evolve it into a true value-added service for our clients. We endeavor to be a partner, making introductions on behalf of our allocators and connecting clients with our network. We work with allocators across the country, with a focus on those outside of the spotlight, like family offices, multi-family office groups, RIAs, and smaller endowments.
We want each of our clients to grow and thrive. We do this by extending the reach of our clients and connecting them with like-minded investors they may have yet to be able to reach independently.
Clear Street’s capital introduction team has extensive experience in the industry, allowing for access to a deep network of differentiated allocators with varying appetites. As we build our team, we’re looking for professionals who genuinely want to build relationships and who take the time to develop them.
Clear Street has made a sizeable investment in capital introduction and in our client’s success via my team. We’re executing on our vision of smaller, curated events with a tailor-made family office network for exposure to allocators in the U.S. and beyond - one introduction at a time.
Contact us at firstname.lastname@example.org to learn more.
This article was originally published in Trader's Magazine.
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