Winning with Hedge Fund Advertising

For PR firms, advertising agencies, and independent marketers, it’s very fashionable these days to present marketing as a simple task. But anyone who’s actually looked into the hedge fund industry will see the truth: marketing a hedge fund to upscale investors and institutions is an enormous task. While it’s easy for a marketing firm to claim that you have a secret method to getting investors to opt into your hedge fund, it’s not so easy to actually deliver. Hedge funds with in-house marketing departments know this all too well. Even when they copy the how-to marketing techniques other industries publish, they still see little to no results. What gives?

The problem certainly isn’t money. God knows hedge funds have enough of that. You might think that competition is the problem. But discourse with your industry peers would tell you that you’re not the only fund with this marketing problem. Ever since the legalization of hedge fund marketing, hedge funds have been struggling to figure out what works for their industry.

I have the answers to these questions. But more important than the answers are the reasons behind them. In other words, if you are to be successful in marketing your hedge fund, you need to first know why hedge fund marketing is so damn hard. What follows are the five main reasons behind the difficulty of marketing a hedge fund.

Reason 1: Differentiation

The first reason marketing a hedge fund is so damn hard lies in the fundamental tenants of what a hedge fund is. Think about how you would define the following in terms of traits (I’ll put my answers in parentheses):

1. Mutual funds (safe, stable growth)
2. Index funds (automatic portfolio diversity)
3. Derivatives (high leverage, minimized risk if buying)
4. Wine, art, etc. (tangible value)
5. Hedge funds (put your answer here)

So what is your answer? A couple decades ago, it would have been easy: hedging against market changes. But today’s hedge funds no longer follow the rule of hedging. In fact, hedge funds can be risker than many other “risky” investments.

So what makes a hedge fund an attractive investment?

This question is a question you will have to answer in the marketing of your hedge fund. Perhaps -- if you’re lucky, that is -- your prospect is already sold on the choice of investing in a hedge fund instead of other investment types. Great, but now you have an even more important question:

What makes your hedge fund a better investment than other hedge funds?

And here is where most hedge funds begin to struggle with their marketing. Instead of differentiating themselves, most hedge funds fall back on the “diversity of investments” claim. In short, here’s what the average hedge fund tells a potential investor:

“We invest in a variety of markets, a variety of financial instruments, a variety of strategies, including arbitrage, buying and selling volatility, investing in developing markets… oh, and our fund manager is really good!”

In other words, most hedge funds make the same claims all the others in their industry do.

Today, there are 9,000 hedge funds to choose from. And more are entering the market every year. Investors have so many choices that you’re a mere blip on his radar. And you will stay that way unless you can differentiate yourself from all those other blips. Being “diversified” or “promising” (something you cannot legally claim if your intent is to promise high yields) does not count as differentiation.

There’s a reason hedge funds are off-limits to all but the most sophisticated investors: The average investor is a poor judge of future performance, i.e., of the quality of a hedge fund. Thus, whether you’re the best hedge fund, staffed by geniuses, or a hedge fund with a monkey as the fund manager, it doesn’t matter to the investor. This holds true for “sophisticated investors” (i.e., your target audience).

The “quality” of your hedge fund does not give you an advantage in actually marketing your fund because every hedge fund is attempting to market on the basis of quality.

Reason 2: Regulations

The second reason hedge fund marketing is so damn hard has to do with the restrictions placed on hedge fund advertising. The financial industry is up there with the real estate and legal industries in terms of dealing with restrictions on how you can advertise. Hate it all you may. Call it an infringement of the First Amendment. But the fact remains: You cannot market a hedge fund as you can a consultant service or a consumer product.

Why do we see so few hedge fund advertisements in financial newspapers and online publications? Probably because hedge funds can’t legally say much about their hedge funds. In addition to that, lots of your advertisement money would be wasted on buying the attention of people who cannot legally invest in hedge funds. So it’s no wonder many hedge funds think “why bother?”

The first hedge fund advertisement since the lifting of the ban on hedge fund advertising was a picture of people mountain climbing. Next to it was a small blurb about “living life on the edge.” When I saw it, I just shook my head. My first thought was disbelief: “They wasted $6,000 on an ad with no attempt to sell?” But my second thought was “Then again, what else can they legally say?”

It seems like the government has something personal against hedge funds. That very well may be. But it doesn’t excuse you to waste money on ineffective advertising. Nor does it excuse you from advertising all together.

Luckily, I know a way around these marketing regulations -- a way to market just as any other business. And yes, it’s legal.

Reason 3: Hedge Fund Reputation

The third reason hedge fund marketing is so damn hard stems from the negative image the public holds of hedge funds. Hedge funds now have the ability to directly interact with the public via marketing, yet they are entering an hostile environment.

A quick Google search on hedge funds will give you an overview of the negative image the hedge fund industry has. Hedge funds are seen as greedy companies preying on the weak, stealing money from the hard-working middle class. Statistically, the majority of hedge funds are legitimate businesses, uninvolved in insider trading, scams, and other illegal, immoral activities.

Now you tell this to the public. Convincing the public that their beliefs are incorrect is a huge undertaking. And when it’s a hedge fund telling the public that hedge funds aren’t evil, the public reacts in the same way they do to politicians claiming that they are working in the interest of the common good: bullshit.

As a hedge fund, you’ll have to overcome the initial reaction of “you’re trying to prey on me” many investors show toward hedge funds. It’s easy to forget that when you’re prospecting, you’re essentially contacting an investor to pitch a deal in which you take 20% of his profits plus a 2% fee on everything, regardless if you help him make money. Oh, and he must lock his money in the fund for a set time period, even if the fund falls 50%.

You’re fighting against a business model that sounds like a scam in an industry full of scams. Here are some recent happenings in the hedge fund industry, as of August 2014:

1. Mathew Martoma, a hedge fund manager, was convicted for “the most lucrative insider trading scheme in US history.”
2. Sahil Uppal, a hedge fund researcher, was caught stealing trade secrets for use in his hedge fund trading strategy.
3. Gabriel Bitran, MIT’s School of Management Professor, together with his son Macro Bitran, ran a $500 dollar hedge-fund scam in which he made false claims about his trading success to investors. Inevitably, the investors got the short end of the stick.

Any bad news for the hedge fund industry is bad news for your marketing attempts.

The way around this, which I’ll be getting into in more depth in a later post, is to distance your hedge fund from “those” hedge funds, via a marketing technique called “positioning.” Note that the average hedge fund just ignores the image problem the hedge fund industry has, acting as if they cover their eyes, the problem will go away and investors will come. This doesn’t work. Bad news for them, good news for you.

As a side note -- and I think this is important -- when you run a legitimate hedge fund and let the world know that you are a legitimate hedge fund, you not only improve your own image but the image of the entire hedge fund industry -- an admirable achievement. Marketing can play an important role in this commendable feat, provided your marketing is investor-centric, letting your investors know that you’re looking out for them. HedgeSys is all about this type of marketing, because it’s a win-win: both investors and hedge funds have something to gain. If I do my part and you do yours, we can drastically change the image of the hedge fund industry.

Reason 4: Hedge Fund Advertising Is Easy to Ignore

Though the fact that people tend to ignore advertisements is true for all industries, it’s even more true for the hedge fund industry. CBS news reports that the average person sees 5,000 advertisements per day. Here’s an important question:

How many of these is he actually paying attention to?

This question is important because the answer is “not many.” If so, why do companies still advertise? Is it a numbers game?

From my background in psychology, I can tell you why: It’s not always about getting a person’s attention. Sometimes it’s just about making an impression. Your brain can interpret an ad in two ways:

1. Logically
2. Emotionally

In the logical case, your brain analyzes the information in the ad, using rational decision making and questioning the claims on the ad. If the ad is convincing, it might just work at convincing the person to act (buy, make a phone call, etc.).

In the emotional case, your brain is just connecting an image to whatever else your eyes happened to grab. So if it’s a picture of a sexy girl drinking a can of cola, your brain will connect the positive stimulus (if you’re a straight male, anyway) of the sexy girl with the neutral stimulus of the can of cola. Through repeated exposure of this type of ad, your brain will make the irrational connection: cola = positive. Next time you’re in the store and see a can of cola, because your brain has already connected the image of cola to sexiness, your brain will release dopamine, making you feel good. That good feeling just might convince you to add the cola to your shopping cart.

So what kind of advertising works for financial instruments? Obviously not the easy “repeated exposure” method that appeals to the emotions (well, this isn’t entirely true, but more on that later). Hence, your hedge fund is going to have to make ads that logically convince people to invest in your fund. But when you’re competing for an investor’s attention with 5,000 ads per day, you don’t have much time to persuade. Yet investing in a hedge fund is not a quick decision. It (usually) requires hours upon hours of thought. You’re not going to capture hours upon hours of a person’s attention with a hedge fund ad, unfortunately.

You can, of course, run your ads anyway via the emotional method and hope that by the time the person decides he needs to find a hedge fund to invest in, he’ll remember you. But that’s a long shot. People are prone to forget things without repeated exposure.

So what can you do? The obvious (I hope this is obvious to you) solution is to focus on the small group of people who are actively looking to invest in a hedge fund, marketing exclusively to them. But how large is this market? And how much of this market gets quickly eaten up by competing hedge funds and alternative investment organizations?

Well, there’s good news. In the hedge fund industry, market size is not a problem. It’s easier to grow your hedge fund with a handful of big investors than it is with hundreds of “average Joe” investors. The key to reaching out to that small market -- and succeeding in capturing their attention -- is the same as that of selling any other product requiring a certain amount of contemplation.

If you’re running a hedge fund, you likely have a car of your own choosing (as opposed to being stuck with something that’s entire purpose is to move you from your home to the office). Can you remember how you came to the decision to buy that particular brand and make of car?

Buying a car is not like buying a can of cola in the grocery store. You likely did some research. You probably went online to check comparisons. You asked friends and family for advice. You might believe that your end purchase was entirely rational, based on your research.

But something more psychological was at play. Once you narrowed down your selection to two or three brands, you probably began to notice those brands on the street. Previously, you probably paid little attention to what others were driving. But after going through the process of performing research, you became more acute at analyzing the differences between and traits of cars on the road.

It’s not that the environment changed; the cars were always there. Your brain changed. You began to focus your attention on areas that you previously ignored. As soon as you made the decision to buy a car, your brain became receptive to the cars on the street, talk about cars -- and most importantly -- advertisements for cars.

It’s the same for computers, phones, real estate...

It’s the same for hedge funds.

What’s the end of that decision-making process? Do you remember? Eventually, you mentally labeled a specific car “yours,” even before you bought the car.

We can do the same thing with hedge funds.

So while hedge fund advertising is easy to ignore, it’s not ineffective. Your challenge here is to get people interested. Your goals are two-fold:

1. To convince uninterested investors to make the mental determination “I want to invest in a hedge fund.”
2. To grab the attention of those who’ve already made the decision to invest in a hedge fund and are still looking for “theirs.”

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