Tip Sheet: Hedge Fund Headaches: Best Practices for Communicating Through Economic Turmoil

By Dan Simon

According to the most recent research by Eurekahedge, the hedge fund industry shrank by as much as a fifth (or $350 billion) in 2008, with 90% of that decrease coming in the three months leading up to November. Much of the reduction was performance related--a 12% average loss across the industry--but the loss of many additional billions was a result of redemptions: nervous investors withdrawing fistfuls of cash from funds as soon as they were contractually able.

Q4 rounded out an appalling year for hedge funds, which witnessed, among other problems, a number of the industry's high-profile prime brokers--namely, investment banks like Lehman Brothers that offer execution services to hedge funds--disappear overnight.

With Shakespearean timing, the Madoff scandal that emerged in mid-December, in which the former chairman of NASDAQ was arrested for orchestrating the largest pyramid scheme in history, kicked an industry that was already on the floor. Though not actually a hedge fund, the structure of Bernard Madoff's $17 billion investment management business was similar to many alternative investment vehicles, and niceties mean very little to shell-shocked investors.

Whether technically a hedge fund or not, the Madoff affair seems to sum up everything Main Street feels the hedge fund industry has become: secretive, unrepentant and borderline criminal.

It would be foolish to suggest that the problems facing hedge funds today are exclusively communications related. Many funds simply made bad bets, ran poor businesses or became the unfortunate victims of a severe global downturn. A few funds even continue to deliver double-digit performance and are unsurprisingly attracting new investors in spite of a recession environment.

Where communications will play a lifesaving role, however, is with the wide swath of barely performing or mildly underperforming hedge funds that exist in the middle ground and that, in turn, need to convince investors and counterparties that they are stable and viable investment businesses despite short-term setbacks.

The challenge for many of these funds is that, when they need it the most, skilled communications pros seem to be in short supply. To date, the success of the hedge fund industry has grown largely on the back of its supposed ability to deliver "uncorrelated alpha"--in other words, to return gains in any environment.

As such, many funds simply didn't feel the need to leverage the power of public relations/communications. For years, performance remained high and when a particular fund was down it didn't matter: Overall market confidence in the sector remained strong. Even uniquely spectacular blow- ups like Long Term Capital Management and Amaranth were seen as just that: isolated incidents, worth examining from an intellectual standpoint but hardly denting the exponential investment in the hedge fund market. With a string of exuberant potential investors lining up at the door, what did hedge funds need with a public relations/communications strategy?

Today, performance is the worst in many of these funds' histories and shows no sign of improving soon and, for the first time ever, there is endemic fear and uncertainty in the market.

These are confusing times in which institutional investors are fleeing to safety and poorer performing hedge funds--even those delivering real returns--are having to explain to a panicked investor base not just why performance is down this quarter but why that doesn't mean they are going out of business. Suddenly, communications has become very important, but few fund managers have these skills on hand. So what can these funds do?

*Get professional about communications. Whether it's the process for investor relations/financial communications or the company's Web site, far too much in the world of hedge funds has been done on the back of the proverbial envelope. It is still surprising how many funds managing $1 billion and above have no professional branding or collateral. Many more have no communications strategy to speak of and very few at all have an employee or internal communications plan.

The days of "Rolodex sales" are over and, whether bringing in outside PR/communications counsel or undergoing a rebranding, hedge funds are going to have to go beyond their traditional comfort zone if they want to attract new investors.

*Stop hiding: "No comment" is not a PR strategy. Particularly post-Madoff, the media is unhealthily obsessed with the hedge fund industry and, like it or not, schadenfreude is driving a lot of this interest.

In the current environment, hedge funds, both individually and as an industry, need to get out in front of negative stories and speculation. To do this successfully, their executives need strong messages, a consistent story and an appetite to engage the market head on.

Yes, engagement can be a risky strategy, but 2008 was scattered with countless victims of damaging speculation and rumor. Even if an organization decides to say nothing, it should at least have an understanding of the media environment and a sense of what the potential risks are--both of which can be provided by said organization's strategic communications advisers.

*If you have good news, sell it. With such a dearth of positive news in the market right now, those who do have an encouraging story to tell should be capitalizing on it to drive investment and grow while others are faltering. One of the unfortunate potential hangovers from the pre-2008 hedge fund market is a predisposition toward silence. If hedge funds don't change their approach and continue this strategy, poorly performing funds will be damaged and successful firms will be prevented from attracting more capital. PRN


Dan Simon heads Cognito Americas, a communications agency focused on the financial industry. Simon can be reached at [email protected].