Although financial advisers are the key drivers in the generation of hedge fund sales, it appears the hedge fund industry and advisers aren't connecting as well as they might, according to a new study.
Financial advisers were the most important source of information for affluent investors when they selected a hedge fund or funds of funds, according to "Beyond Performance: How Hedge Funds Can Strengthen and Build Their Affluent Client Base."
Eighty-five percent of hedge fund investors surveyed — who invest an average of $25 million in funds annually — "turned to financial advisers for direction when seeking hedge funds and funds of funds," according to the report from Prince & Associates Inc., a high-net-worth research firm in Redding, Conn.
And nearly 64% of the hedge fund investors described a financial adviser as a "very" or "extremely" important source for making their selection. Other key sources of information investors use in making hedge fund decisions were their own networking or research activities (48.8%); an investment management consultant (21.5%); an accountant (19.4%) and seminars and conferences (17.5%).
However, a whopping 95.7% of financial advisers who were surveyed said that hedge funds do not understand their business, and 88.7% said hedge funds sales efforts are ineffective.
The primary reasons, according to the report, are "inexperienced third-party marketers, sales professionals and wholesalers, one-size-fits-all presentations and aggressive sales tactics and product positioning that leave little room for productive dialogue or interaction."
Hedge funds need to do their homework and customize their approach to advisers and wealth managers, said Russ Alan Prince, co-author of the report with Hannah Shaw Grove and president of Prince & Associates. Ms. Grove is principal of HSGrove Private Wealth Consultancy in Edison, N.J., and an equity partner of Prince & Associates.
"They have to learn what's ap-propriate for firms and clients," Mr. Prince said. "For example, a fund will come in and say, 'You should do this for all your clients,' when a hedge fund clearly isn't appropriate for all an adviser's clients."
"Hedge funds aren't making the effort they should," said Howard Altman, co-managing principal of Roseland, N.J.-based Rothstein Kass, an accounting and consulting firm that specializes in hedge funds and sponsored the report.
But advisers need to do more as well, Mr. Prince said.
"Advisers don't understand hedge funds, either," he said. "They have to find a hedge fund with which they can develop a professional rapport and bring to the table for those clients for whom it makes sense.
"Advisers also need to find funds that can offer the right solutions for their clients' needs," Mr. Prince said. "Often these are esoteric solutions that advisers are not comfortable with themselves, such as currency or commodity issues, or shorting stocks."
Robert Pitti, a partner at San Francisco-based Argos Wealth Advisers LLC, said advisers need to recognize when their expertise does — and doesn't — incorporate the selection of a fund. "If they need to know more, they should find someone who does. There are good independent research firms who can objectively evaluate hedge funds."
Hedge funds themselves need to be more transparent when dealing with advisers and wealth managers, Mr. Pitti said.
"It would be very helpful if they explained how it is exactly they make money." he said. "This is especially true for single family funds."
The estimated 12,000 U.S. hedge funds also need to do a better job of marketing and branding themselves, given the increasing sophistication of affluent investors and the fact that they are legally prohibited from advertising, the study noted.
Specifically, the report urged hedge funds to identify market segments such as high-net-worth in-vestors, who tend to delegate decisions to their financial advisers, and single family offices, which make their own investment decisions, and target them accordingly.
"A core component of branding is to get the right message out to the right audience," Mr. Prince said. "Hedge funds need to identify those audiences, craft the message accordingly, manage client relationships and create satisfied clients."
The "Beyond Performance" study was based on interviews with 428 hedge fund investors in the fourth quarter of last year, Mr. Prince said.
E-mail Charles Paikert at [email protected].
