COMMENT www.hfmweek.

com

THE LONG VIEW

DIANE HARRISON compares the hedge fund capital raising process to the Boy Scouts guide to building a re

INSTITUTIONAL CAPITAL IS THE FUEL OF FUND ASSET RAISING. IT TAKES LONGER TO GATHER THAN KINDLING OR TINDER, BUT OFTEN COMES IN LARGER CHUNKS

A pencil can be considered as kindling, as can thin dry branches and twigs. High net worth capital is the kindling of a funds assets. To acquire this stage of investor, a manager must have proven his competence at both generating investment performance as well as satisfying a threshold of operational integrity across risk management, infrastructure, reporting, and client relations. Once part of the funds asset mix, this step allows the manager to reach out for the third stage of asset raising, the institutional investor. STEP 3: FUEL The last step to building a fire is to add fuel. Fuel can be a stick or a log, depending upon the amount of kindling used in Step 2 and the type of fire you wish to build. Fuel takes a while to ignite, but once burning, can sustain its heat for a long time. If added to the fire strategically and allowed to develop a solid base of coals, fuel can burn for hours, and if banked properly, can smoulder for days without the addition of more fuel. Institutional capital is the fuel of fund asset raising. It takes longer to gather than kindling or tinder, but often comes in larger chunks. It requires an existing infrastructure and a support process for allocation goal-matching, client relations, and reporting in order to be acquired. Once acquired, it often carries an investment mandate that has a longer time frame, diverse investment goals, and a sustainable relationship practice that gives a fund manager both size and stability with which to run and grow the funds business. If added strategically and allowed to develop a solid relationship base with a fund, institutional capital can remain for a very long time. FINAL THOUGHTS The Boy Scout Handbook provides some relevant last thoughts in fire-building that I leave you with here: see that a fire is attended to at all times. Make sure that water and/or a shovel is readily available. Promptly report any wildfire to the proper authorities. See that your investors family and friends, wealthy individuals, and institutions are attended to at all times. Make sure that the funds investment and operation activities and reporting are readily accessible to investors. And finally, report any wildfire to the proper authorities. DIANE HARRISON is principal and owner of Panegyric Marketing

o paraphrase, God may be in the details, but simplicity is, well, simple. Raising money for a fund is hard, very hard, and most managers will fail to achieve great success at doing so. Lets try to simplify the steps needed in this challenge, and while were at it, lets compare this process to a tried-and-true approach that has been used by hundreds of thousands of people, the Boy Scouts. THE TETRAHEDRON EFFECT The diagram comparison below illustrates the simplicity of this seemingly random comparison. What follows will attempt to put the four elements into context.

The asset raising parallel for hedge funds is easily made: in order to grow in assets, the progression of capital logically follows in sequence family and friends to high-networth individuals to institutions. A fund with $15m in AUM can easily attract interest from wealthy individuals, but it wont secure a pension fund investor. There are three types of materials that will be needed to build your fire or your fund. The fire references are all courtesy of The Boy Scout Handbook, our expert guide for the process. STEP 1: TINDER Tinder is the first level of combustible for fire. It catches fire easily and burns immediately upon combustion. Examples of tinder include wood shavings, dry grass, shredded bark, and even cotton or paper make good tinder. To start a fire you will need approximately a hat-full of tinder. Family and friends capital is the funds first level of combustible for building a fund. It is easily persuaded to take a chance with the manager, based on personal experience with or knowledge of his skills at investing, and is likely to be resistant to exiting if the first year or two of the fund proves a bit rocky. In this case, family and friends capital is considered to be NOT hot, which in asset management is a good thing. STEP 2: KINDLING Kindling also catches fire fairly easily and burns a bit slower than tinder. You will need two hats-full of kindling for your fire.

FIRE FIRE The Fire Tetrahedron shows the four elements required for combustion to occur. To have combustion you must have oxygen, heat, fuel, and a chemical reaction of the other three elements. A matchstick would easily burn with a small flame, but you wont be able to burn through a thick log with only a match-stick in your hand. (Source: The Boy Scout Handbook)