(c) Match.com
As many of you may have read in my last blog, I spent about six weeks of 2016 delving into the sometimes-smarmy world of online dating. One of the first lessons I learned, besides the liberal use of the “block” function, was that a picture of a potential match was not just a nice to have, but also a necessity.
(BTW, I swear to you all, this is the last time I will mention my horrifyingly brief online dating experiences. It’s not my fault that recent events have spawned a few Match.com flashbacks.)
You see, much of the descriptive language available to would-be daters is fairly subjective. Words like “Average” “A few extra pounds” and even “Athletic and Toned” mean different things to different people. Hell, even descriptive statistics that shouldn’t have been subjective were sometimes unpredictable. I mean, 37 years old means 37 years old, right? Yeah, unless it means 45, 47, or 50.
Before I became online dating savvy (read: scarred for life), I would sometimes have email conversations and agree to meet these faceless souls. I quickly learned that “Average” meant “A Few Extra Pounds.” “A Few Extra Pounds” heralded someone the size of my living room sofa. “Athletic and Toned” meant “Once Did A 5k.” “Salt and Pepper” translated to “Gray” and sometimes “Bald.” And “No Kids” could mean “No Kids,” “Some Kids” or “I’ve Been On Jerry Springer About My Kids.”
So you see, pictures of potential suitors could be helpful. They weren’t definitive – sometimes a picture was taken AT 37 and still utilized eight or more years later – but they were at least sometimes directionally correct.
Sadly, my professional life isn’t so different.
I spend a tremendous amount of time meeting with fund managers. Most of these managers are shiny and new, fresh-faced and full of faith that their first $100 million allocation is mere months away. They are the would-be suitors of the investment world, and they are here to get a first, second, and the all-important third date (bow chicka wow wow) with your capital.
Unfortunately, many of them are lacking the investment industry equivalent of a profile picture: Performance. Instead, they are asking potential investors to take it on faith that performance will be as described in their oh-so-earnest pitch books.
Only problem is, most investors have been on so many dates with fund managers at this point that they’re just a little bit dead inside. Faith isn’t on the menu, while skepticism is served at an all-you-can-eat due diligence buffet. We all know that past performance is not a guarantee of future results, just like a dating profile picture is no guarantee of recognizability in a bar, but at least it gives you some characteristics to look for.
So how do you solve a problem like performance?
1) Predecessor Performance – For a pre-launch fund manager, this is the gold standard of pseudo-track record. If you have performance from a prior fund management gig where you managed a decent chunk of change in substantially the same strategy with substantially the same investment team, it can be of tremendous help to investors. If the performance is audited and portable (meaning you’re not prohibited from using it by your former fund complex), so much the better. Again, past performance won’t necessarily be the same as your future results, but this provides at least a small window into how you may perform in different market environments and what type of drawdowns to expect (although my cold, Grinch-like heart says all drawdowns will be exceeded at some point). Make sure the fees are the same (or provide imputed fees in the same structure as the new fund) and that will satisfy some investors. Do know, however, that for every aspect of the prior track record that differs, there will be a credibility discount. Don’t have your former co-portfolio manager at the new fund? That’s an issue. Going from long-only to long-short? How do we know you can short? And so on and so forth...
2) Trade Your Own Account – For those that do not have access to a portable track record for whatever reason, you should start actively trading your strategy. Now. Actually yesterday. With real American dollars. While it is unlikely that the AUM will be similar (which will discount the performance with some investors) and while it will be a shorter track record in (likely) only one market environment, it’s something. It also shows that you believe in the strategy enough to stake your own financial future on it. Frankly, even if you have a portable track record, creating live performance ASAP makes some sense.
3) Paper Portfolios or Backtests – This is obviously not optimal. In my (too frequently offered) opinion, paper portfolios are only appropriate if you trade a strategy where need substantial AUM to proceed (for ISDAs, etc.). Otherwise, you’re just announcing that you’re not willing to put your own skin in the game. And backtests can be gamed in any number of ways. After all, it’s always easier to plot a course if you know where you’re going to end up. Of course, there are very few investors who will allocate based on backtested or paper portfolio performance alone, but if it’s the best you’ve got, then it is what it is.
I eventually set my online dating search criteria to “photos only.” That saved me a few headaches, although who knows if I missed “twue love” by avoiding as many frogs as possible. To minimize your chances of getting blocked completely by investors, and to maximize your chances of marrying your investment strategy with some AUM, try to proactively solve for performance sooner rather than later. Ideally, you’ll want to negotiate for your track record when leaving your prior firm, but if that’s not possible, do whatever you need to post returns. After all, a VAMI chart can be worth 1,000 words.
