How do you improve your chances to raise capital? Tell a good story. Yeah, it sounds simple, but you have to tell a story that investors will remember. A recent article written by James Armstrong in “Traders Magazine” cites Bruce Frumerman, who heads the consulting firm of Frumerman & Nemeth, which helps start-up firms better position themselves to attract capital. While the article is not related to Alpha Theory, I believe there are several points made by Mr. Furman that explain why our clients have leveraged their use of Alpha Theory to help them raise capital. According to Frumerman, “the number one cause of money management firms closing their doors is not because their trading strategies blew up. Rather, it’s because they couldn’t get enough people to understand and buy into how they run their portfolios.”
Mr. Frumerman goes on to say, “in addition to having all of the right systems in place, such as trusted service providers and a solid legal structure, a firm needs to know how to properly tell its story, to fully relate how it does its research, risk management and decision making. One complaint institutions have had is that while post-crash there is more data transparency, more numbers don't reveal what the underlying investment beliefs thinking and investment process was. They are looking to determine whether portfolio managers are doing something on an ongoing repeatable basis, or if it was just serendipity that they happened to get the returns they did.”
I believe funds must tell a story that investors will be able to recall two weeks or two months down the road. A story they will be able to relate to their investment committee. This means the pitch must be concise and tangible. Concise means you go for 10 slides not 100. Tangible means you give examples and structure. Alpha Theory makes your investment process tangible.
Mr. Frumerman goes on to explain, “in a post-crash environment, investors are looking for transparency, and that means something different today than it did before 2008. It used to be investors wanted to know what all of a fund’s holdings were---now they want to know that and the logic behind all of those holdings.”
Alpha Theory provides a central system to answer the “logic behind all of the holdings” like, “Why did we invest in every stock in our portfolio? / Why did we choose the position sizes we currently have? / At what price will we add or trim our positions? / What were we thinking about company X on January 1st and were we right?” These are basic portfolio management questions, but portfolio managers commonly give unmemorable answers like, “we constantly monitor the portfolio to make sure that our best ideas are our largest positions and that we’re reducing our exposure to the weaker ideas.” That answer isn’t tangible. A screen shot of Alpha Theory is something that any potential investor is going to remember when deciding whether to take your fund to the investment committee. Provide something tangible, something memorable, and you’ll definitely improve your chances to raise capital…and maybe your process too.