Being a FINRA licensed third party marketer for hedge funds and running a firm of third party marketers has taught me a good deal. I get asked a lot of questions regarding how third party marketing works so I thought I would discuss various aspects here.
First, the basics. What is hedge fund third party marketing? Third party marketers (3pm's) are essentially hedge fund brokers. They represent various hedge fund products and introduce and sell these products to qualified investors. As a result of the introduction and follow up by the marketer, if an investment is made, the 3pm gets compensated. Usually compensation comes in the form of a portion of fees. The 'standard' 3pm fee is 20/20. That is, twenty percent of both the management fee and the performance fee. This is usually paid to the 3pm's brokerage firm as the fund receives its fees, and is usually paid to the marketer for the life of the client.
Where does a hedge fund manager find third party marketers to market their hedge fund? The Third Party Marketers Association (3pm.org) estimates there are about 500 third party marketers in the United States. Not very many, relative to the amount of hedge funds that are out there. There are several firms like mine, HedgeCo Securities, that are set up to exclusively market hedge funds. You can find these firms by searching some of the various hedge fund website service provider directories, or by looking at 3pm.org. Keep in mind, with some 10,000 estimated funds, and only 500 3pm's, it is easy to realize why 3pm's have a reason to be picky. So if you are a hedge fund that is less than 10-25 million (and I am being very generous here), don't be surprised if you do not find a third party marketer to represent your fund.
To be candid, raising money for smaller funds is harder. It lessens that amount of investors you can put the hedge fund in front of, allocations are typically smaller, track records are usually shorter, and performance risk and other various risks are higher. That being said, some 3pm's will make an exception when they see attributes that are promising. The manager may have a great pedigree and strategy for example, but does not know how to market the product or have any investor contacts. Other ways to entice third party marketers if you are a smaller fund could be by offering a higher fee split, or a 'seed' type relationship where the marketer is given a percentage of ownership based upon assets raised.
If you are a hedge fund, and are looking for third party marketers, some items to think about include:
- Is the marketer licensed?
- What is their experience in raising assets for hedge funds?
- How do they source their investor contacts?
- How do they make sure these investors are qualified to invest in your fund?
- Will they 'screen' their investors with your firm prior to introducing your fund?
- Does the firm have any disciplinary items your firm should be aware of?
- How many hedge funds does the firm market?
- How many salespeople will be marketing your hedge fund?
- How many other hedge funds with a similar strategy does the firm market?
There are plenty more but these should give you a good start when interviewing potential candidates.
In "Hedge Fund Third Party Marketing and Marketers Part 2" we will be discussing regulation and how it applies to marketing hedge funds.If you are looking for help with capital introduction, prime brokerage, or third party marketing for your fund feel free to email me for consideration at email@example.com.
Evan Rapoport is a registered principal and offers securities through HedgeCo Securities LLC. Member FINRA, NFA, SIPC.