By: Christopher Manlove
If you grew up and live in Minnesota as I have, there is a pretty good chance that you have spent a fair amount of time in the winter skating or playing hockey. This is the “State of Hockey” after all, and many of us natives have some level of interest in the game. Some outsiders describe our love of hockey as a fanatical obsession, which is relatively accurate. It’s a fast moving, hard hitting game with a lot of information flow that must be processed effectively for a player/team to have success – what’s not to like?
As a long time player and youth hockey coach, I find it’s easy to forget how complex the game can be, especially in the eyes of young or new players. When coaching, one of the first things we focus on regarding effective game strategies is the big picture (i.e. moving the puck away from traffic into open areas of the ice). By finding ways to simplify the game, we remove much of the complexity and can help young players with their decision making on the ice. By narrowing their focus and strategic objectives, we can hone their knowledge into a natural flow and reflex so their odds for success significantly improve.
Similarly, there is usually a great deal of information that must be processed in order to determine what is relevant when attempting to make effective investment decisions. With a plethora of alternative investment strategies, managers, and market related information available, even experienced institutional investors can become overwhelmed. As advisors to alternative investment managers, we spend an enormous amount of time helping them focus the large amounts of information related to their strategies into a clear, concise, and compelling message.
It is pretty common to see fund manager presentations that start out containing 40 to 50 or more pages of information. This can be a telling sign that the manager does not know what information is relative or important, and/or simply included everything they had available. It can often be difficult for hedge fund, private equity, real estate and other alternative strategy managers to simplify data and thought processes and clearly describe their strategy to others. Significant time spent on the state of their market or the macro environment, for example, just adds complexity if the investor does not first have the framework necessary to understand how that information is relevant. From experience, we have found that if potential investors are not able to clearly grasp a manager’s strategy, opportunity set, the associated risks and fit with their broader portfolio, those investors will not be in a position to properly assess the manager’s value proposition.
Complexity for investors is the enemy of execution; LPs today are drowning in information when what they need is understanding.
By eliminating extraneous information, managers put potential investors in a position to better understand their strategy and decide whether their offerings are relevant. As an example, conversations with investors should begin by focusing on the following to help communicate precisely what the manager is trying to accomplish:
- The opportunity set you focus on
- The specific way your strategy takes advantage of that opportunity set (trade structure, etc.)
- Why you and your team are best positioned to execute your strategy versus others (edge and application of that edge)
- The biggest risks that may cause the strategy to be unsuccessful
- How your strategy may fit in the investor’s overall portfolio
- How your team is culturally positioned for long term success
When managers learn to effectively change their conversation to one that teaches and engages investors, the interest they receive tends to increase dramatically. In alternative investments, just like in hockey, removing complexity improves understanding, decision making, and the overall probability for success.
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