Practical analysis for investment professionals
14 April 2016

How NOT to Approach Allocators

How NOT to Approach Allocators

The following is an excerpt from the new book by Ted Seides, CFA, So You Want to Start a Hedge Fund, published in February 2016. 

The Circular File

Allocators occasionally come across inbound solicitations that exemplify what not to say when reaching out to prospects. Almost immediately, these emails are tossed in the electronic version of a garbage can. Most solicitations that end up in the Circular File make outlandish boasts that elicit comedic reactions.

The first two examples are actual emails whose authors might as well have claimed they invented the question mark. The emails, grammar, and typos are in their original form with only the sender’s biographical information removed.

Example 1

November 2, 2010

If seeding worth $50M can be secured before entering 2011, I believe that I can generate $200M as a return on capital by 2012.

I am a contrarian value investor. But above all, I have accurately timed every major market movement over the past 3 years, including the market bottom. Outperforming nearly every single hedge fund manager over the past few years and effectively managing a completely (100%) leveraged portfolio, through an incredibly difficult trading environment, have uniquely prepared me to effectively manage a sizable fund, while maximizing return and minimizing risk.

Prior to the “market bottom”, I established overweight positions in drastically undervalued financials.

Below is a summary:

Historical Performance

12/2007 — Correctly anticipated upcoming economic downturn and prepared to raise capital (Bearish).

11/2008 — Finished raising capital at 0% via Credit Cards, etc. and began to indentify investment opportunities.

02/2009 — Fully invested. Went “all in” by taking an overweight position in what were at the time some of the most undervalued securities, in effect calling a bottom in the stock market (Bullish).

03/2009 — Market bottoms.

10/2009 — Reached peak portfolio valuation (well over 100% ROI).

12/2009 — Called a “range-bound, sideways market” for 2010 (Neutral).

01/2010 — Refinanced Credit Card debt at 0%.

05/2010 to 11/2010 — Market has been range-bound for the greater part of 2010, as suggested by my analysis from last year. Dow has been oscillating between 9500–11500.

In simplest terms, I got it right when it counted most. I will be reaching out next week.

Unstated allocator response: Our parents taught us that when something is too good to be true, it usually is. Thank you for providing such a clear example.

Example 2

September 2, 2014

I am planning on starting a hedge fund which would invest in technology stocks.

I have a Ph.D. in Molecular and Computational Biology from the University of Illinois. This proves that I have a serious tech background.

With your help of providing seed funding for the hedge fund, I could start trading in technology stocks ASAP.

PLEASE help me to launch.

Technology runs in my blood. Technology is what I do.

I guarantee returns of ~30% in the first year by investing in Apple, Facebook & Intel.

I can make it happen. I promise.

I can be reached at xxx-xxx-xxxx. I hope to hear from you.

Thank you.

Unstated allocator response: We’ve heard of the “KISS” principle, but this seems a little too easy. You may want to watch that language as well; with any success, the SEC will be reviewing your stated guarantees.

Example 3

In the third example, an email carrying the unimpressive header “+132% strategic seed opp” enclosed a table that manifested flaws in its process and rendered the proposition a nonstarter. It doesn’t take two decades of experience to recognize a repeated violation of self-imposed risk limits.

Screen Shot 2016-04-11 at 10.55.51 AM

Unstated allocator response: We understand that consistency is the hobgoblin of little minds, but you’re only batting 38% on your own risk guidelines.

With so much noise hitting allocators every day, taking time to address each solicitation individually is a sensible tack. The best way to be well received is to be well introduced, so start close in with the people you know.

We learn best what to do by gaining an understanding of what not to do. Only a tiny percentage of the thousands of solicitations I reviewed over the years were as poor as those in the Circular File, but the worst of the worst makes clear that gaining a foot in the door of a crowded room takes more than a cold call or email.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: iStockphoto.com/robodread

About the Author(s)
Ted Seides, CFA

Ted Seides, CFA, is the Managing Partner of Hidden Brook Investments, LLC, an advisory and private investment firm. His first book, So You Want to Start a Hedge Fund: Lessons for Managers and Allocators, (Wiley) was published in February, 2016. Seides was a founder of Protégé Partners LLC, where he served as President and Co-Chief Investment Officer. He began his career in 1992 with the Yale University Investments Office. Seides sits on the Board of Trustees of the Greenwich Roundtable, and is a Trustee and member of the investment committee at the Wenner-Gren Foundation. He serves on the Board of Technoacademy, and previously was a Board member of Citizen Schools-New York. Seides holds a B.A. in economics and political science, Cum Laude, from Yale University, and an MBA with honors from Harvard Business School.

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