In every corner of the financial services industry, nearly every firm claims to be unique.
They say they are different. They say they have the people, process, and formula for investing that competitors don’t. They say their brand is the most trusted in the industry.
In reality, most investment firms end up telling the same generic, predictable story.
Some of this isn’t their fault. In recent years, as market volatility remained low and asset prices continued to trend mostly up, there wasn’t much firms could hang their hats on as true differentiators.
Many financial firms were still stabilizing their reputations following the financial crisis, and as long as the markets kept going up, being different didn’t seem to matter—everyone was making money. The challenge of differentiating has been especially acute for active managers, whose ability to deliver alpha can be washed out, to a large degree, by a rising tide.
Adding to the challenge is the exponentially noisy modern media ecosystem. The proliferation of social media, mobile chat apps, and other emerging technology platforms, as well as changes to traditional media and advertising, has made it more difficult—and, oftentimes, confusing—for a firm to tell their differentiated story.
Even if an investment firm had a truly unique story to tell, what channels should they use to reach their desired audience? And how should they tell it?
On February 26, the Chartered Alternative Investment Analyst Association (CAIA) hosted its “Outlook for Hedge Funds” luncheon in Chicago. One of the major themes that the panel, which comprised professionals from across the institutional investment community, addressed the rising pressure on fees hedge funds are facing.
The panelists agreed that in the face of this pressure and amid heightened competition, managers need to do a better job of articulating what makes their strategy truly differentiated.
Why 2018 will be different: volatility’s return
This year, volatility has returned to global markets. Rising wages, low unemployment, and inflation fears have increased the possibility that the Federal Reserve under new Chairman Jerome Powell will raise its benchmark interest rate four times in 2018 instead of three—a development that promises to add choppiness to major indices.
Moreover, although the fundamentals of the U.S. economy remain strong, markets could be in store for a wild ride in 2018 thanks to uncertainty around geopolitical and trade risks.
The Trump administration’s recently announced plan to impose a 25% tariff on steel imports and a 10% tariff on aluminum, for instance, have stoked investor fears of a trade war with key international allies, furthering the prospect for near-term market volatility.
Finally, new forms of alternative investments like cryptocurrencies; the prospect of high-profile, venture-funded “unicorn” companies going public; and continued industry disruption by tech’s “top five” (Amazon, Alphabet, Facebook, Microsoft and Apple) promises to create opportunities for event- and distressed-sector-driven strategies that will allow firms to tell their differentiated stories.
Added pressure: as fees trend downward, storytelling trends upward
Another big driver of storytelling’s significance is increasing pressure investment firms are facing on the fees they’re able to charge for their expertise.
Synchronized upward movement in the markets left little to be desired by way of differentiated investment strategies. But volatility’s return—propelled by a renewed investor appetite for active, risk-protected approaches—appears likely to change that. This should provide even more urgency for firms to get their distinguished message out to their desired audience, thus validating their fees.
Brian Payne, a hedge fund analyst for the Teachers’ Retirement System of Illinois, said at the CAIA luncheon, “If we have a board meeting for 60 minutes, 55 of them are going to be spent [discussing] the fees of managers who aren’t generating the returns we expect.”
Payne said that large public institutional investors like TRS “need to be selective in where you spend your fees,” and often this means being willing to spend more for differentiated managers in niche strategies.
So, how should investment firms approach identifying, and then telling, their differentiated stories?
Look inward
Nat Kellogg, director of manager search and managing partner at Marquette Associates, said at the CAIA luncheon that many hedge fund managers create their marketing pitch books in the wrong order. Firms always seem to start with information about their team, their firm, their process, and other non-differentiating information. Then, usually buried somewhere near the back of the presentation, they will have a slide or two about their approach to risk management, trade structuring, performance drivers, or something else that truly sets them apart.
Investment firms, including hedge funds, should start their unique-story-discovery process by first doing a self-analysis of the firm’s process and performance, Kellogg said. Firms should look at their returns and identify what has worked and hasn’t worked as a basis for identifying what makes the firm different from competitors.
“Everyone should be doing it, but you don’t see it that often,” Kellogg said.
Identify your niche
Once that self-analysis is complete, determine one investment strategy to project as the one that makes the firm unique, and make sure there’s something the firm does in its research, preparation, or execution on that strategy that is truly remarkable.
For example, William Steele, managing director, investments, Evanston Capital Management, said at the CAIA luncheon that if your firm has investments in, say, coal in China, showing that your firm literally travels to a Mongolian mine to evaluate it first-hand is a truly remarkable differentiator.
Pick your channel
Today’s digital marketing environment makes it easy to fall into the trap of wanting to use every channel to get your story and message out. Not every audience is active on, say, Twitter, Facebook, and other social media channels, so dedicating too much time to those areas isn’t efficient. Take some time to research and identify the channels your desired audience is most active on and spend the majority of your time creating content that matches the context of how people consume on that medium.
Determine your process
Creating compelling thought-leadership content isn’t easy. But it’s made more manageable if a step-by-step process is created before diving in. Start at a high level with an outline, then with a first draft, then with a round of edits or two before finalizing the message for publication.
Craft your story
With your true differentiating elements clear and your channel identified, now it’s time to create the content. Keep the channels in mind as you write; you don’t want to create content that isn’t context-specific to a particular channel.
For example, writing a 2,000-word white paper isn’t going to lend itself well when readers are consuming it mostly on mobile devices. So adapting that main piece of content into supplemental parts—say, like an interactive webpage—will go a long way toward ensuring your desired audience finds it useful and engaging.
Analyze the results
Once the message has been distributed and you’ve had some engagement with your desired audience, take some time to tweak your approach based on the results.
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For more insights into how investment firms can create compelling content that tells their differentiated story, download our complete e-book on investor letter writing best practices.
About the Author
Frank Kalman is the chief operations officer at Wentworth Financial Communications. Frank and the team of writers and editors at WFC help professionals across the financial services industry build their brands by creating investment-grade white papers, bylined articles, newsletters, blogs, social media posts, and other forms of content marketing.