Capital Raising in a Hybrid World

To answer your question, Elana, how I got to where I am today. So I started on Wall Street back in 1995 on the sell side in high yield bonds and distress securities. I was hired into the business by Rich Handler, the current CEO of Jefferies Group at Jefferies. Rich was my first boss, he's a tremendous leader on Wall Street. I spent nine years in total on the sell side, advising hedge fund clients and institutional clients regarding high yield an distress securities. I was at Bank Boston after Jefferies, then Society General SG Callan, and then a boutique firm until I started my first hedge fund in 2004.

I launched my first hedge fund, a long short credit fund, with my partner Burton Weinstein, who had managed money for the Tisch family at Lowe's corporation for a number of years. We launched with a seed investment from Capital Z Investment Partners. We launched at 50 million dollars at launch and we grew it to 670 million dollars of AUM in three years. Unfortunately, the financial crisis hit us pretty hard being that we are a levered credit fund and we shrunk after 2008 and I left the firm for a new opportunity in 2009.

I then about a year later joined a friend's hedge fund, Helios Advisors. While there I launched a long short energy fund. After launching that fund, I wanted to have my own firm again and with a friend of mine who is a biotech analyst at SAC, now point 72, we launched a Long Short Biotech Equity Fund with the Wolfson family as our seed investors and Julian Robertson of Tiger Management as our anchor investor. For those who might not know, Julian Robertson is the legendary godfather of long short equity. After a few years of unfortunately not performing that well during what was then the strongest biotech market in history, I realized I needed to look for a new situation. Through a lawyer friend of mine, I was introduced to my partners, Jack and Isaac, who after seven years together are managing just on their 50 million. Their strength is trading and investing, but not marketing and growing a business.

So we made a deal and I joined them in April, 2015 and in less than four years we grew from under 50 million of firm AUM to over a billion dollars of AUM. We built a very strong infrastructure and team, we changed our service providers, and we had a strong low vol track record. We grew by traveling the world and attracting institutional investors. Because of our low exposure strategy, we created a two-X strategy, an enhanced fund. That attracted quite a bit of capital. And we continued to develop an international investor base over the years. And then that brings us to where we are today.

Unfortunately, we did have a rough patch during COVID-19. It was a very challenging time for us. We had a draw down, and being that we're a very liquid fund, monthly with 45 days notice, we became the ATM when the crisis hit. We eventually stabilized and that brought to where we are today, just over 400 million. And hopefully we'll slowly rebuild from here.
EMS:Jeff, capital raising is always top of mind for hedge fund managers and due to the COVID-19 pandemic, like you alluded to, over the last nearly two years at this point, it's no secret that the industry had to pivot. I wanted to hear you own thoughts on what your firm did to pivot and stay in front of your robust global investor base and also target new ones.

Well, that's a great question, Elana. It's definitely been a challenging time and a lot of advisors have approached it differently. There is still quite a lot of capital out there. Actually, Hedge Fund AUM to has hit a record of 3.7 trillion dollars. Investors need to invest their money. I think investors have tended to lean towards advisors that they know and are familiar with because they can't get out there and do onsite visits and onsite operational due diligence. So part of our main focus has been going back to former and existing investors who know us well, are people that have been tracking us for a period of time. Frankly, the most recent investors were just that, people I've known for over five years.

In terms of attracting people that you have not met before, new investors, for us that has been more challenging because the performance is in a rebuild mode. But those advisors that have done phenomenally well, I think they are able to track new investors and new capital without site business through virtual capital introduction programs, which have become very, very popular. It seems to fill the void of an in-person conference, like Contex or Salt or other events. The prime brokers have really stepped up the virtual capital introduction events and that has been very productive for many, many managers. And we're hopeful it will soon be productive for us.
EMS:Jeff, I know you just alluded to this, but what have been some of the most successful capital raising stories during COVID 19? I know you just mentioned circling back with investors you've had relationships with prior, is there anything else that you wanted to mention today?
jS: Well, I'd say it's really just staying in touch with investors, Elana. I try to reach out to all existing investors every three months, I try to reach out every six months to people that have been tracking us that aren't current investors. For investors that left us after the COVID pandemic began, I kind of gave it a year and started reaching out. You wanted to get a year behind you from the COVID situation and the draw down. It's really just been about staying in front of investors in different ways. The success stories that you ask about, I could just tell you funds that have put up real big numbers have been able to raise the money.
EMS:Okay. And, Jeff, on the other hand, I know you previously alluded to this earlier about some of the biggest obstacles that you faced during the COVID-19 pandemic with respect to capital raising such as targeting new investors, but is there anything specific you wanted to mention?

Well, I think the great challenge is just not being able to get out there, meet in person. And that's slowly changing. Not being able to have a handshake, have a coffee, have a beer. The investor that might not see you or take the time for a virtual call, if you're in their city, you're in Hong Kong, you're in Singapore, you're in Zurich, they might be more likely to take the meetings since you are there already. So not having that opportunity to get on a plane and go see investors, for me personally, has been very, very challenging. Not being at in-person conferences to meet new people has been somewhat challenging. So hopefully come to new year, we will see the Delta variant peak and plateau, and then subside. And then please, God, there'll be no new variants and hopefully the world will really open up again. Right now it's going in the wrong direction. The EU is putting restrictions on US or non-central travel until November. The US is having restrictions on EU non-essential travel. But hopefully towards the end of the year, that will subside and we can get out there again.
EMS:Jeff, you mentioned it's really too challenging not being able to go to the industry conferences or getting drinks or coffees or meals with prospects, but I wanted to ask you, have you done any in person meetings? Since I know some people have once vaccination started happening.
jS: So I really haven't done that much. I have gone to the city every couple months. I'm actually planning on going in next week. Very excited actually. But we're in Central New Jersey and it was always a bit of a challenge to get investors to come down to our offices being that we're an hour and a half outside of Manhattan. Many investors might go to Greenwich, they might go to Northern Jersey, but to come down to Central Jersey is a bit challenging. I have heard of some in-person meetings in the city. Being that we are still in that stabilization rebuilding mode, we haven't had that many. We did have one investor in the summer come from Switzerland to New York and we did go into the city to meet with them. And that was quite exciting. But we really have not had that many in person meetings at this time. And it's really more a function of us just staying low as we rebuild our track record.
EMS:And. Jeff, what advice do you have for managers to be successful now raising capital?
jS: So, Elana, first, I think at the end of the day, it starts with having performance behind you. You need to have performance. If you don't have good performance, then it's going to be tough. It used to be if you had good performance, money found you. Nowadays, if you have good performance and you get out there, you will get the money. If you have mediocre performance or average performance, but strong marketing, you'll still be able to get the money. But if you have weak performance or no performance, then it's going to be tough. So it really does start with performance. And then it's about staying in touch with investors and points of contact and being transparent and offering up value to them and trying to find how your strategy differentiates from what they might have in their portfolio already. So it's really about adding value.
EMS:And, Jeff, what do you think the future holds for capital raising once we come out of COVID-19? Do you think it'll be a hybrid of virtual and in person events? It seems like a lot of what you alluded to, the prime brokerage virtual events, have been extremely successful. So I'd love to hear your thoughts on this topic.
jS: So I personally think it's definitely going to be a hybrid world. Just like back to the office will be hybrid, I think capital raising will be hybrid. I used to take two trips a year to Asia, I was going to Europe on average seven times a year. People traveled like that, like myself. I think that gets cut in half. Maybe I'll go to Asia once a year. Instead of two trips to London, it'll be one a year. Instead of two trips to Zurich and Geneva, it will be one. I think half of those trips will be replaced virtually.

But I think people will get back out there again. Those that don't might be at a slightly competitive disadvantage. I think once we come out of this pandemic, it will definitely be a hybrid scenario just like the workplace, as I mentioned. I don't see the majority of businesses going back to the office a full five days a week. There'll be many variations, but it's going to be a hybrid world going on from here. We all know everyone is buying online. When bricks and mortar people are regularly going back in the stores, they are not going to stop buying online. It's just too convenient. We are going to be in a hybrid world in many ways going forward, in my opinion.
EMS:Jeff, you said a lot of great insightful things on the topic of capital raising and in person events and virtual events, and I just wanted to see if there are any final thoughts you would like to share with us today.
jS: Sure, Elana. I would say this whole pandemic, with the isolation and the quarantine and the locks down, really showed how much we value social and human interaction. Although we are heading for a hybrid virtual world, as we just discussed, I think we see the need of having human contact and interpersonal relationships. The toll that the world has seen pulling back from those interactions, I think has been very significant. And probably one of the biggest untold stories out there is the mental stress of the pandemic. We are, in the end, social animals and we value human relationships and interpersonal relationships. Hopefully when the pandemic really does end, travel will come back and socializing will come back. Hospitality, food, restaurants, and human relations will resume in a normal way. I think we'll all be very appreciative of the relationships we have.
EMS:Jeff, thank you so much for sharing your perspective with our listeners.
jS: Thanks for having me, Elana, always a pleasure
EMS:And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.