DMAXX

Raising AUM is universal for any size CTA

: 01 Dec 2016

Big and emerging CTAs alike have one need in common: growing assets under management. Although the large CTAs who get the lion’s share of investment funds have a different path, the truth remains: assets come and go and the hunt for new money is universal.

So what do the experts advise in this hunt for investment? What should all CTAs be doing, and how does that change as AUM grows? Here are some pointers from managers, third party marketers and asset allocators on how to grow your AUM.

What Investors Want

In a 2014 study by Cogent, (and updated by Johnson & Co in 2016), it was found that large investors, from where a significant amount of money is entering the managed futures industry, are consistent in their needs. Both pension and non-profit funds see integrity and transparency as a first hurdle. Of course, investment performance also is key, along with organization stability. Interestingly, fees and fee structure ranked seventh, with risk management practices not far behind.

Bryan Johnson, of Johnson & Co. notes, “The fundraising climate is filled with stringent expectations by investors along with increased operational requirements.” This means an especially high bar for smaller managers, those with less than $100 million AUM, as they have the most “mistake-filled” marketing efforts and typically “have no real marketing process,” which leads to “guesswork, poor choices, inconsistent behavior and fatal mistakes.”

Even in the billion-dollar world of large CTAs, raising funds can be difficult, especially as firms need to set themselves apart from other behemoths. And though big investors say fees aren’t as key, they are. One reason all the new smart beta strategies have evolved – mainly through large trend following CTAs – is to give pensions, who are used to paying investment manager by basis points, an option to utilize the strategy without the risk, or über performance.

For smaller or emerging managers, there is a need to make a name, and often this comes through adopting new or unique strategies.

Andre Boreas, CEO of Quadsight Partners, says, “Investors these days are looking for a unique strategy that compliments their existing portfolio.” Understanding this going into an investment meeting “can make the difference whether your material actually gets read or gets the 15 second fly-by.” These investors want to know how you can “add value to their total portfolio.”

For example: if your strategy focuses on distressed credit, and you’ve learned asset allocators believe “the time’s not ready” for that market, educate them. Engage them on what is happening in that market, including anything from “energy assets to European bank debt.” This insight will help as they make their future selection and set you apart. Likewise, if your CTA focuses heavily on commodities, educate allocators on the need for diversification and exposure to this asset class especially with the uncertainty that a move to less globalism that the incoming administration campaigned on will have on equity prices.

Universal Truths

For any size CTA, there are core rules every asset manager recommends:

• Maintain ongoing dialogues with your current clients for additional funding, and leverage your clients to be introduced to potential new prospects.
• Provide updated performance information on regular basis as well as explanations of your approach.
• Maintain ties to organizations and school alumni groups for networking.
• Attend conferences set up to be mixers for CTAs and asset allocators, focused on your CTA size. For example, CTA Expo/Emerging Manager Forum purposely was designed for emerging CTAs who need to meet those wanting to invest in new and growing talent. Even if brand new to the business, it’s good to start meeting allocators, but attend any conference with a plan: set up appointments prior to attending, have key marketing materials, know who you are meeting and remember it’s not always about you. Focus on their needs as well.
• Hypothetical track records will take you as far as family and friends. If you haven’t actually put real money in the game, your message will be lost. In a similar vein, if you have less than a 2-year track record, you’ll need to outline how your trading would perform in various economic cycles.
• Hire a third party marketer, if possible, that will allow you to focus on your business and trading; that said, be available to meet potential asset allocators; you can’t simply outsource your sales and marketing and expect to be successful.
• Be able to explain your trading clearly and simply. Focus on your main strategy, for example: short-term trading with focus in financials, and move on from there. Be able to explain any changes to the program, drawdowns, new products, etc.  Convey how your alpha generation is repeatable, as well as have available key quantitative measurements, such as risk, daily exposure, alpha vs. benchmarks, and volatility.
• Be able to explain your operation, and why they should feel confident in your business organization, especially back office operations.
• Be prepared for a long gestation period for their interest to take hold, always follow up without being a pest, and be ready for disappointment. Most people you’ll meet with won’t be investing, but each meeting will be educational.
• For larger firms that have long track records, it’s important to understand what big money, such as pensions, endowments and corporate funds have done with investments in the past. Also, today consultants are the key pathway to these big firms, which hire them to do the leg work. That said, it’s typically the pension board that makes the final call, usually but not always following the consultant’s advice. The lesson here is to get to know the consultants and make sure they are informed about you, and any new products, as is the final client.   Consultants can make or break an investment.
• Look at all options for raising capital. Today there are several trader “platforms” such as Kettera, Oasis and Genesis that actively search for CTAs to include on a platform in which clients can review and pick and choose CTAs for a portfolio. Sometimes a CTA will have to put up initial capital for these platforms, and it may be well worth it as an extra tool to raise funds. Larger platforms, such as those of Deutsche Asset & Wealth Management and Lyxor, typically appeal to big money, so for smaller managers, check out the independent platforms. Also, check their distribution methods and which ones provide the best clientele.
• Access business through your broker: leverage that relationship whenever possible. Many brokers won’t do marketing for CTAs, but some select ones will push what they consider strong players to their clientele, which can be a far-reaching network. The best advice is to keep working with your brokers to determine how they can help you increase your AUM.

One final note: The DOL’s new fiduciary rule going into effect April 2017 impacts qualified assets, retirement and tax exempt funds on the brokerage side, basically saying these funds can no longer pay commissions to brokers, but need to pay in basis points as registered investment advisors are currently paid. Call this the institutionalization of the business where large futures funds and CTAs have entered the mutual fund arena with either smart beta or other types of funds. Fees of old will be bypassed; for example, BoA Merrill Lynch has already told its brokerage team to quit selling mutual funds to retirement accounts due to this change [Note: a Trump administration has said it might disband this ruling]. This does not affect non-retirement funds, but as one fund manager said, CTAs should realize that fund raising on a large scale will need to be focused on finding the best distribution networks, such as those made up of RIAs. Bone up on the regulations to see how it will affect your business.

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Dana M. Comolli is president of DMAXX (dmaxx.com), a back office software design firm for alternative investment managers. TheBooks software is designed for the trader, and is built to do price, position and order management, reconciliation, trade accounting, performance reporting, risk and data management and act as a gateway to a wide variety of execution platforms. You can reach Dana at: dana@dmaxx.com