A p r i l 2 0 1 714 C o m m e n t

With major metropolitan centres, higher learning institutions and a high

concentration of high-net-worth and ultra-high-net-worth individuals, atfi rst blush, the West Coast off ers hedge funds a� ractive capital-raising prospects.

California is home to one-third of the world’s tech fortune and reoccur-ring waves of health care and other entrepreneurial ventures have also created enormous wealth, which is handled by a number of sophisticat-ed single family offi ces, multi-family offi ces and highly regarded private bank branches. Stanford and the Uni-versity of California System are two of the top 10 largest university endow-ments in the world. In addition, suc-cessful hedge funds such as Canyon, Oaktree, Farrallon and Passport were launched in the West Coast, which also hosts some of the leading FoF complexes. Finally, when you add tre-mendous wealth created through real estate, you have key elements for a target-rich prospecting environment for hedge fund strategies.

However, once on the ground, managers quickly realise that the en-vironment diff ers dramatically from what they might be used to in East Coast money centres. There are key logistical, cultural and philosophical diff erences that one should take into account prior to actively engaging in a West Coast marketing eff ort.

Barriers to entryWhereas the East Coast has a high concentration of fi nance profession-als in investment and commercial banking, asset management, private equity and hedge funds, outside of Sil-icon Valley and the tech behemoths, the West Coast tends to be more en-trepreneurial, middle market-focused and less hung up on college pedigree. Institutional investors are commit-ted to hedge fund strategies and the promise of uncorrelated returns, but as opportunities are highly coveted, the staff tend to be very senior and portfolios mature. With the possible exception of Stanford, where there was a major reorganisation recently, the challenge for a manager looking

to establish themselves and diff eren-tiate against the competition is one of portfolio replacement rather than participating in a de novo asset allo-cation exercise. The challenge is two-fold; absolute outperformance versus strategy expectation and relative out-performance against the incumbent strategy in the portfolio. Achieving both creates a high barrier to entry.

On the entrepreneurial side, the ecosystem and culture of risk-taking serves to create a formidable barrier to entry for hedge fund managers, who will o� en fi nd themselves hav-ing to compete for a pool of capital which will also consider investing in direct opportunities delivered through tech or healthcare networks.

Across our universe, we’ve ob-served an active shi� of investors moving closer to the trade – they seek to gain direct access to the source of alpha or return as opposed to working through an intermediary. This trend has been prevalent on the West Coast for years, and like cra� beer and good coff ee, it is also start-ing to move east.

There’s plenty of wealth on the West Coast but for hedge funds, prospects are not always golden. Andrew Saunders and Ma� Donaldson of Castle Hill Capital Partners highlight some of the area’s main trends and what managers should consider when approaching investors there

California dreamin’

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Cultural differencesIn our experience, allocators in Cal-ifornia are less crushed by inbound inquiries than their peers in other major financial centres and don’t gen-erally have eight to 10 meetings a day, giving them the ability to operate in a more relaxed fashion. This is not to be confused with being any less knowl-edgeable or able to evaluate a strate-gy but rather, they are able to spend more time thinking critically about how managers execute their strategy and make money.

Our clients often come away from initial meetings highly optimistic, only to be disappointed when second meet-ings and major allocations don’t mate-rialise. Investors look managers in the eye, offer them undivided attention and are curious as to how they make money – you rarely see phones on the table or mid-meeting texts. There is a Midwestern niceness that pervades the dynamic, which contrasts to a dis-tracted hardcore East Coast efficiency, and added to this, among certain allo-cators, a regional bias. A fellow Santa Cruz alum that likes to surf may have a better chance of striking up a rapport with a prospect than yet another NYU finance graduate parachuting in, but of course, a positive initial first meet-ing is no guarantee of a follow-up or an early indication of capital.

Logistical challengesManagers hailing from Europe and denizens of the East Coast often fail to realise the distance and enormity of the West Coast, which can pose signifi-cant logistical challenges when setting up a series of investor meetings.

Unlike financial centres that are rel-atively easy to navigate, where having five meetings a day could be consid-ered a disappointment, the distance and logistics of the West Coast man-date that IRs manage expectations on what constitutes a successful visit. A successful day in southern California might involve a meeting in Westlake, another in Pasadena and a final meet-ing in Orange County. Those three meetings might take about five hours

in the car. Similarly, in the Bay area, a day may start in the financial district, take you to Marin and then down to Silicon Valley, but while the Mercator projection makes Portland and Se-attle look close – IRs should reckon on spending at least three-and-half-hours on highway I5. Having been stuck in I5 traffic, one begins to ap-preciate the call for high speed rail in the Golden State.

It is due to such logistical chal-lenges that the few West Coast con-ferences that feature in the annual events calendar, such as SALT (May), IMN Alpha Hedge West (September) or the Milkin Institute (April), are well attended. Such events act as a locus of activity around which IRs can build a three- or four-day trip, significantly increasing the potential return on expense and cost of time away from the office.

Due to the limitations described herein, managers offering a niche and truly differentiated opportunity have the highest probability of suc-cess. Hedge fund IRs and portfolio managers need to understand how to demonstrate their firm’s competi-tive advantage in a market segment unrepresented in investors’ portfoli-os, while recognising that it will take time and perseverance, with multiple trips required. Fortunately, it’s a nice place to visit. •

Andrew Saunders is co-founder and senior managing director, based in New York, while Matt Donaldson re-cently joined as a managing director in the firm’s Los Angeles office. Cas-tle Hill Capital Partners provides a range of brokerage, strategic mar-keting and capital-raising services for alternative asset managers.

The investor landscape

The landscape can be broken down into institutional and entrepreneurial sources of capital.• Sophisticated endowments and foundations active in the hedge fund space include Getty Trust, Cal Tech Endowment, Hilton Foundation, Broad Foundation, UCLA Endowment, USC Endowment, Stanford, University of Washington Investment Mgmt. Company (UWINCO), University of Oregon, Pepperdine Endowment, Berkeley Endowment, The Moore Foundation, The Fuller Foundation.• Institutional investors and consultants such as Calstrs, the State of Washington and State of Oregon lead the pension fund league tables, while local pension plans include Lacera and San Francisco. Cliffwater, Wilshire Associates, Meketa, Arnerich Massina, CTC Consulting and RVK are among the West Coast-based consultants with broad alternatives coverage.• Single offices control money for the founders of Yahoo! and Facebook. In addition, the family offices for Bill Gates, Paul Allen, Larry Ellison, Oprah Winfrey, Eric Schmidt, the Bechtel family, a branch of the Pritzker family, the Whitman family in addition to Richard Merkin and Ron Burkle all have a dedicated presence in the region.• Large, institutional multi-family offices / RIA complexes include Coldstream, Threshold Group, ICG Advisors, Aspiriant, Hall Capital, Sequoia Heritage, Ascent Private Capital, Bel Aire, CCM Group, Luminous and Whittier Trust, which all serve the needs of UHNWIs and offer alternative asset portfolios.

“We tracked our inbound requests from marketers [last year]. We had 1,000 people asking for a meet-ing. We took 300 meetings, and we invested in three managers.” LA-based foundation – December 2016

“We have been having discussions about the proliferation of funds and their effect on the market. We do not have any conclusions, but picking managers has certainly become much harder with all the noise in the system, and we are thinking of what are the best ways to compound capital for the long term going forward, and whether there are other options besides the standard endowment model to investing for the future.” San Francisco family office – February 2017

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