Third-party marketing is a consulting service provided to hedge fund managers who need the expertise of seasoned marketing professionals. Third-party marketing firms, also known as third-party distributors, employ experienced investment marketing and sales experts. These individuals raise assets for hedge funds through their relationships within distribution channels, including institutional investors, broker-dealers, investment platforms, financial advisors and high-net-worth individuals. In this article we'll explore this lucrative field, describing how these experts bring in the big money, and what a career in third-party marketing entails.
Why Hire Third-Party Marketers?
Hedge funds hire marketers because the hedge fund manager's core expertise is usually in managing the portfolio for investors, and not growing new relationships with them. While the majority of hedge funds use only one marketing firm at a time, some do employ several, assigning specific geographical regions or distribution channels to each. Most third-party marketers make money by charging a small retainer while also taking 20% of all management fees on assets raised.
Becoming A Third-Party Marketer
One challenge of starting a third-party marketing career is finding a firm that will take the time to show you how they operate and compete against other firms in the industry. Most marketing firms play it close to the vest, and are slow to hire unless the individual applying for the job is coming from another third-party marketing firm or can show a substantial track record of raising assets that can be confirmed by some objective means.
Licensing requirements present another barrier to this field. Most well-established third-party marketers are associated with a broker-dealer, and depending on what types of products they are marketing, third-party marketers are usually required by law to be licensed. Some third-party marketers establish their own broker-dealer to fulfill this requirement while others simply form an agreement with an existing broker-dealer. (To learn more, check out Should You Add A Securities License To Your Repertoire? and Putting Licenses To The Test.)
Employing A Hired Gun
Most third-party marketing services are completed off-site within the offices of the marketing firm. These firms may be working on behalf of many hedge fund managers at any one time. There are dozens of activities that third-party marketing firms provide to their hedge fund clients, but most can be split into one of two categories: marketing and sales.
The range of activities completed by a third-party marketer depends on the size and background of both the firm and hedge fund client. The types of marketing services that third-party marketing firms may offer include:
- Developing marketing materials
- New product guidance
- Investor database development
- Media relations
- Request for proposal (RFP) development
- Event marketing
Many third-party marketers work with their hedge fund clients on a commission-only basis, but some have strong marketing backgrounds and charge a moderate retainer while also taking a percentage of the fees on assets raised. The importance of whether a third-party marketer has helped with marketing, public relations, database completion or selecting a new assistant portfolio manager pales in comparison to the importance of how successful a third-party marketing firm is at raising assets for its client. There are exceptions, but most marketers are evaluated almost exclusively on their ability to raise assets. (If the marketing side appeals to you, read The Marketing Director's Pitch.)
The sales activities that third-party marketers take on can include:
- Cold calling
- Attending industry conferences
- Managing a sales team
- Choreographing conference calls and on-site visits
In general a third-party marketer manages the sales cycle for hedge fund clients, involving the chief investment officer or other portfolio managers as needed to educate potential investors or meet with analysts. Duties include educating potential investors, or meeting with analysts. Sales cycles can range from as little as six weeks to as long as 18-24 months. Because of this, most third-party marketing contracts are for three to five years and often include momentum clauses that ensure that the marketer is compensated even if the sale comes in after they stop working with this particular hedge fund client. (For more on the sales side of third-party marketing, check out Sales Director Career Provides Daily Challenge.)
Hedge funds conducting due diligence on a third-party marketing firm should always ask questions about the firm and their employees. Evaluating a potential marketer should be as rigorous as completing a RFP for an institutional consultant. A partnership is being formed, and investing time and money with the wrong professionals can be expensive in terms of real dollars and opportunity costs. Areas to cover while conducting due diligence on a third-party marketer include:
- Past work experience
- Current licensing and broker check
- Asset-raising history throughout their careers
- Asset-raising track record while working together within the firm
- Referrals from past hedge fund clients
- Number of years experience
- Scope of their distribution channel expertise
- Number of total current clients
- Potential commitment of time in terms of hours per week and duration of the contract, and
- Personality and culture of the group
At the same time, third-party marketers need to perform due diligence on a potential client. If a hedge fund manager has a poor reputation, it could reflect poorly on the marketer that is doing the promoting.
The potential to soak up 20% of a hedge fund's management fees is an obvious attraction to this career path. However, this is a challenging, cutthroat industry to work in. While third-party marketing services will always focus on marketing and sales, their service models continually evolve and adapt to meet the demands of their hedge fund clients.