The hedge fund industry continues to attract capital, but in modest amounts, and at speeds which are uncomfortably slow. Investors are cautious, and inclined to shift their allocations towards the largest and most business-like managers. To whom can the start-up, the small and the mid-sized look for help? Marilyn Brydges might just be the answer.

“In all my years, the thing I have enjoyed the most is marketing,” says Marilyn Brydges. “I love meeting new people. In fact, I love cold calls.” That is an unusual pleasure, but it explains why she is so good at marketing hedge funds to investors. Since she set up MAIA and then MB Advisors, starting in 2005, the former investment banker has raised capital in the hundreds of millions. This is an impressive record in a field which may not be a mom and pop business, but which is not the preserve of major organisations either. In fact, third party marketing of hedge funds to non-institutional investors was dominated during the boom years by people and organisations whose chief qualification for playing a role in capital introduction was being as rich as the clients, or wanting to be as rich as the clients. This was an amateurish and conflicted approach –and, indeed, some its leading practitioners - did not survive the winter of 2008-09. Nobody selling hedge funds will ever have it as easy again, but the shake-out has created room for more serious, experienced and better informed third party marketers. Marilyn Brydges is among them. Having held senior positions at both Bankers Trust and Swiss Bank Corporation, Brydges can tell the difference between a short butterfly position and an equity total return swap. Having run businesses and advised large corporations, she can also tell whether a hedge fund is being run on a sustainable basis or not. “Because of my background, I really do understand the trading strategies,” says Brydges. “So I can fully explain to my investors how the strategies work, and why they are making money or not making money at particular times. I can also tell whether a hedge fund is a sound business, as opposed to a group of people who are good at fund management or proprietary trading. I am not a puppet marketer.”

In markets such as these, however, even the best capital-raisers are operating in a slower-moving and more constrained environment. Many of the investors that Brydges works with were hurt by the crisis. Some were invested in Madoff. Others suffered massive redemptions. Many still lack sufficient liquidity to invest again. “Three years ago, I had a Rolodex of clients that I would call with a great fund, and they would invest without even meeting the manager,” recalls Brydges. “There was so much money in the system. That approach does not exist anymore. Persuading people to invest has got a lot harder – as it should have done, and as it should always be.” In the European marketplace where she operates, the demand for liquidity has become a significant barrier to investment. Brydges says that the same strategy can raise hundreds of millions of dollars in the United States with a one year lock-up, but must offer easier redemption terms in Europe. “European investors are still very concerned that you have a liquid strategy,” she explains. “They also want to make sure that your underlying assets are aligned with your stated liquidity. This reflects the huge problems that emerged during the crisis, when funds claimed a level of liquidity which their underlying assets could not match. European investors do not want to look at funds which have anything more than monthly liquidity.” Only to a limited extent is it possible to trade fees for lock-ups, and then only if a fund is mature. Differential fee structures also entail full disclosure to all existing and prospective investors. Side-letters have survived into the new era, but have to be fully disclosed to investors, as do sizeable investments by a single investor. “You really cannot mess about any more,” says Brydges. “You have to disclose 100 per cent up-front. You have to be really transparent about what you are doing, and in particular where you are making your money from.”

Who is making money out of you is an issue too. Having multiple prime brokerage relationships is now de rigueur, albeit chiefly to limit the counterparty risk. The contemporary European investor is even attentive to the name and status of the administrator of a fund, which is a degree of detail at which his predecessor of 2006-07 would have scoffed. The notion of entrusting the assets of a fund to a separate custodian bank, on the other hand, has not excited the investors Brydges deals with to the same extent. Neither the bankruptcy–remote custody options devised by the prime brokers nor the prime custody offerings of the global custodian banks have even come up in discussions with investors. Brydges thinks this is largely because the fund managers have eliminated it as an issue. “Segregated custody does come up, but most funds I deal with have already appointed a custodian separate from their prime broker,” she explains. “These days, hedge fund managers are looking to minimise the obstacles to investment. They want everything to be completely safe, separate and squeaky clean for their investors.” This attitude helps to explain why so many hedge funds now accept managed accounts, which they would have refused out of hand three years ago. “I do not know of any fund manager who has a problem with managed accounts,” jokes Brydges. “They are getting money!” But she does agree that the costs of setting up and running managed accounts mean that they are uneconomical at investments of less than $5 million, and that most managers set a threshold of $10 million. They do not always disclose it, because fund managers no longer have the luxury of choosing between investors. “Two years ago, it was difficult to find a good hedge fund, let alone one at the exact moment when they were looking for an external marketer,” says Brydges. “If a manager had $300 million under management, he might not want to work with an external marketer, because he felt at that time that he could raise $1 billion. That has changed totally, completely. It is much easier to find good hedge funds now, even those who have a large amount of AUM. The investor side is what is difficult and that process is taking much longer.”

Naturally, this feeds the suspicion among fund managers that capital raisers are failing to explain their genius to investors. Dissatisfaction with the results of capital introduction services of all kinds is the most common of complaints of hedge fund managers. The Brydges recipe is to manage expectations aggressively. “You need to have a really good and close working relationship with your managers,” she says. “Now, more than ever, they need to be kept informed about, and to understand, the fund raising process.

It has grown much longer and more complicated, and if a fund manager is not in the loop with you, it is easy for him or her to conclude that you are not doing enough.” She keeps close to investors too, even to the extent of advising family offices on their hedge fund investments. This has the added advantage of giving her the opportunity to attend capital introduction events hosted by prime brokers. Unlike the capital introduction teams within the prime brokerage houses, whose ability to press the claims of clients on investors are restricted by the inherent conflict of interest, third party marketers can sustain a relationship with an investor after the initial contact. “One of the difficulties with the cap intro model is that they will arrange for investors to come and meet a fund, but it is the fund which has to do all the follow-up work,” explains Brydges. “Cap intro would work much better if a fund came to the events with their marketer, whether the marketer is internal or external. It is not enough to sit in a meeting, especially now, when it is so difficult to raise money. To raise money now, you have to be in the front of the investors’ minds. Yours has to be the name they think of. The only way you are going to achieve that is by pushing, pushing, pushing. That said, it is important to understand the sensitivities of investors, and to understand their process, because it is a process. Raising money is a process.”

It is a process in which it can be hard to gauge who the third party marketer is working for: the investor or the fund manager. After all, he or she is not paid until an investment takes place. But Brydges refuses to see any conflict of interest. In her view, the successful third party marketer has to stay close to both sides, after an investment has taken place as well during the process itself, because that is the only way to secure the information that builds and retains confidence. She could not keep investors abreast of the risks and performance of the funds she persuaded them to back unless the fund managers are relatively open with her about what is happening to the fund. The anxieties of investors about present performance have to be managed, especially when a fund has a bad month or quarter. Their expectations of future performance have also got to be set at an appropriate level. “You have to have a sufficiently strong relationship with your managers to ensure they tell you as soon as an investment strategy turns bad,” explains Brydges. “Then I have to call all my investors. Like all things in life, you have to face everything head on. You cannot hide in a corner and hope it does not fall further. I do not believe in that. If we had a bad month, it is better to explain the reasons why, and what is being done about it. People understand that. After all, we are all in the same industry. But investors do want to know that managers care about their money.” Fulfilling that fiduciary responsibility entails openness and a willingness to share information, which in turn depends on the confidence Brydges can instill in the managers she works with. That trust counts most for Brydges is evident in her dismissal of hedge fund ratings of the kind now offered by Moody’s and Standard & Poor’s. These do not impress investors, says Brydges, and not only because their confidence in ratings as a process has yet to recover from their dismal performance during the crisis. “So few funds have availed themselves of one that it is hard to tell if a good rating would count for anything or not with investors,” concludes Brydges.

Yet who exactly are her investors? Not pension funds, or at least not many of them. Pension funds may seem desirable, but they are not the obvious target of a third party marketer. When it comes to hedge fund allocations, most rely as heavily on their investment consultants as they do in all other matters, because it gives them a scapegoat in the event of disaster. The paradox is that the consultant is rarely made accountable even for the most disastrous investment decisions. Nor are they accused of conflicts of interest (though many run money) or taxed with allegations of cross-subsidising services (though this is their main means of defeating the competition). There are exceptions – the Universities Superannuation Scheme has actually in-sourced its alternative investment management – but they tend only to prove the rule. In fact, the handful of pension funds that Brydges works with all insist their investment consultant remains involved. “They have made a decision in advance that they do not have the expertise,” she says. “Therefore, since they are outsourcing the expertise, they want the expertise to be there. It is difficult to argue with that.” The largest pension funds also need to find substantial funds for an investment to make a material difference to performance. Their allocations are rarely less than $25 million, and that restricts the range of hedge fund managers they can seriously consider. Below that level, hedge fund managers are restricted to family offices, private banks, wealth managers and those funds of funds whose model has survived the shake-out. These types of investor, found mostly in the United Kingdom or Switzerland, are precisely the sources of capital where Marilyn Brydges has chosen to concentrate her energy.

They remain the most important investors in hedge funds, despite the much-vaunted institutionalisation of the industry. Funds of funds in particular still make up more than two fifths of respondents to surveys of hedge fund investors, and outrank other sources of assets under management. Unsurprisingly, Brydges finds them both bloodied and bowed by the experience of 2008-09. “A great many of them have not survived,” she says. “2008 was a serious wake-up call for funds of funds. Their due diligence is much more thorough, and they are a lot more risk-averse.” Though they retain a sizeable share of the money invested in hedge funds, and some funds of funds have done better than others. The funds of funds industry as a whole is still experiencing net redemptions. “Like so many things in financial markets, there are phases in the development of the hedge fund industry, and there are a great many people who think this is a phase, and that people will come back to the fund of funds market,” says Brydges. “And there is a logical reason to invest through a fund of funds, if it is doing its work properly. There is no doubt that they had to increase their levels of due diligence exponentially, and really get to know their managers.” Yet she too finds it hard to believe that funds of funds would have survived at all, were it not for the failure of the major investment consultants to develop a viable alternative, despite adding staff to their hedge fund consultancy groups.”Fundamentally, funds of funds still have a problem in winning back the respect of investors,” says Brydges.

She has seen their fees narrow considerably from the 1- 1½ per cent for management and 10% or more for performance that they charged in boom. She regularly encounters funds of funds still struggling to escape the consequences of the leverage they assumed at the top of the market in a final bid to turbo-charge performance. ”Not all fund of funds used to manage their portfolios,” says Brydges. “A lot of them just chose their managers, then waited every month or quarter for the managers to tell them what they had gained or lost. They were not doing overlays on what they thought was happening in the market. In addition to selecting and managing the managers, a fund of funds should be managing the portfolio of managers at the macro-level.”

Private banks - which are substantial users of funds of funds, albeit less important than family offices and institutional investors - are open to much the same charge. They of course derive most of their investment monies from wealthy individuals, which induces a commendable degree of caution in Marilyn Brydges. Indeed, the aboriginal hedge fund investor – the high net worth individual – is a conspicuous absentee from the MB Advisors client list. “I have never really dealt with rich individuals, even before the crisis,” says Brydges. “The reason for that has always been regulatory, at least in my mind. I could never satisfy myself that the person I was dealing with could always satisfy all of the requirements. It is not possible to verify they always meet the requirements. I am very, very serious about my regulatory status. I have never dealt with individuals, because I do not feel comfortable with the whole thing.” Given how many private banks are willing to deal with virtually anyone prepared to make a large deposit, this means that Brydges has to choose carefully the private banks she works with too. “These days, every investor has to sign KYC and AML declarations,” is her telling verdict. Brydges is actually more comfortable talking to the larger regional IFAs in the United Kingdom. Though most insist on regulated funds only, they nevertheless represent a potentially large source of fresh capital for hedge fund managers prepared to issue UCITS funds. “Having a UCITS vehicle opens a fund up to a huge swathe of wealth managers, especially in the United Kingdom,” says Brydges. “The same is true of Germany, where investors and their advisers are incredibly conservative.” In effect, the long-only money which the conventional wisdom of 2007 earmarked for 130/30 funds is now investing in alternative investment strategies through UCITS funds instead. But Brydges worries that many wealth managers are treating UCITS funds as a prophylactic against disastrous investment decisions, and fears a damaging debacle that contaminates the entire hedge fund sector. “The fund is as risky as the fund is, regardless of the legal structure,” she warns. “In fact, because people think a UCITS wrapper makes a fund a safe investment, some fund managers have launched a UCITS fund, despite the fact their strategy does not suit a UCITS structure at all. The outcome is questionable.” An obvious instance of this risk is the long/short manager who depends on shorting single stocks but is debarred from short selling within the UCITS structure, forcing them to adapt their trading style to derivatives instead, in order to conform to the UCITS regulations. For a start, using contracts for differences is more expensive than shorting single stocks, eroding performance. And there is now evidence, says Brydges, that UCITS-compliant versions of the same strategy do perform less well than the Cayman funds they are supposed to mimic. “The managers tend to say it is because it is more expensive to run a UCITS funds, though whether it is because of that, or for trading reasons, is not yet clear,” she warns. “Certainly the closure of BlueCrest’s $630 million UCITs fund was due to the fact that the trading constraints imposed by the UCITs structure caused the UCITs fund to have lower performance than their Cayman fund - the cumulative tracking error was 3.5 per cent.”

Inside or outside a UCITS wrapper, the identification of funds and strategies that will not only survive but perform is what investors want most from third party marketers. With virtually every hedge fund strategy either flat or down or up no more than a smidgen this year, picking managers that investors believe will outperform benchmarks inevitably leads to a degree of group-think. “There is some interest in global macro, and especially in those that trade in the fixed income area, because of the dislocation in the bond markets,” says Brydges. “Interest is also reviving in long/short equity, in anticipation of a decline in equity market volatility, making it safe to go back to stock pickers.” She admits to being cautious about which funds she wants to market to investors. “Do not think the last few years have not made a difference to me as well,” she asserts. “I myself am much more cautious about the funds I am prepared to work with, because all that I have is my reputation.” Fortunately for her, that reputation has solid foundations. Her career in the financial markets stretches back 34 years to the International Department at Bankers Trust, which she joined straight from New York University in 1977, where she studied mathematics and economics. Whether it was because the management thought she was up to such a demanding assignment, or that she would be unable to refuse so early in her career at the bank, the management of the international department did not take long to test the mettle of their new recruit. When her opposite number at Bankers Trust GmbH in Frankfurt quit unexpectedly in 1980, Brydges was invited to replace him. “Although I did not speak a word of German, I had been there so many times that I thought it would be a doddle,” she recalls. “In fact, in the beginning few months I cried most evenings as I tried desperately to learn German.”

Importantly, Brydges never wilted publicly. She spent a month in Munich to immerse herself in the language, and made such a success of the job that her superiors never had cause to question her mental strength again. It was not an easy job, but certainly an interesting one. If one part of her beat was predictable (German-speaking Europe) the other (central and eastern Europe) was anything but. It was another ten years before the Berlin Wall came down. Bankers Trust had developed an orthodox corporate lending business on the western side of the Iron Curtain, though its real competitive advantage lay in its pioneering role in adding interest rate and currency swaps to otherwise ordinary issues and loans. In addition to marketing the bank to corporate clients, Brydges was responsible for building up the sovereign client base in central and eastern Europe, and travelled regularly to Moscow, Sofia and Warsaw.

“It was the most fascinating time – ever – to be in eastern Europe,” she explains. “When I arrived at an airport, there would always be someone to pick me up, even though I had never asked to be met. That person would stay with me till the moment I left. At the hotel, he would sleep in a chair outside my door. Even what were considered to be the best hotels had cockroaches, and unimaginably awful food.” The business issues were equally elemental, consisting mainly of helping state-controlled foreign trade banks manage their foreign currency needs. But Brydges handled them with such aplomb that in 1985 she was invited to take 15 months out of her career with the bank to join its executive development programme back in New York.

The programme, devised and delivered by academics from the Harvard Business School, was tough. “It was very intense, and we all worked very hard,” says Brydges. “We had an accounting course, a credit course, an economics course. I think I worked more with numbers on that course than I ever did at NYU.” But she graduated among the top three in her class, which earned her the right to choose where she worked next in the bank. Brydges knew she did not want to stay in New York, and chose to join Allen Wheat, who by 1986 had steered Bankers Trust International into such a dominant position in the burgeoning swaps markets in London that it became the launch pad for a career which ended as chairman and chief executive of Credit Suisse First Boston (CSFB). Once again, her role was to cover German-speaking Europe. She stayed four years, until Wheat and 20 of his colleagues decamped to CSFB in 1990. That same year, a head-hunter tempted her to take a managing directorship at Swiss Bank Corporation (SBC), where she led Eurobond origination and derivatives marketing throughout Europe. SBC was then a major powerhouse in the Euromarkets and, although the work was interesting, the job was immensely demanding in terms of time and pressure. Clients were queuing up to have their issues underwritten by a bank whose senior management could barely keep up with the volume of credit decisions, and deals were often dependent on finding a counterparty with whom a swap could be agreed. After two years, Brydges quit to start a family. But even a young son and daughter could not slow her down. With a like-minded female partner, she opened and ran a nursery, with an eye on the burgeoning opportunity to run similar establishments for large companies, which then enjoyed tax breaks on providing child care at work. Predictably, regulatory changes scuppered that plan, and Brydges sold the business. “I thought, `what am I going to do now?’” she recalls. “I had to do something. And I really missed being in the financial world. I loved being in the financial world, because it is just so interesting. Every single day, there is something new – a new idea, or a new twist, or a new way of looking at things. But the basics remain the same, so once you know the fundamentals, you can deal with anything.”

The problem was that by 2004 Marilyn Brydges had not worked in the financial markets for 12 years. She solved it by a characteristically systematic and tenacious application of the Harvard networking methodology. “You meet anyone and everyone you have ever known in the industry, and by the time you have finished meeting with them, you have three other names,” explains Brydges. “It was such a good system. Within two months, I had appointments every hour of every day. I was meeting ten people a day. It was fantastic, brilliant. I learned such a lot. I met people on the operational and legal side of hedge funds, as well as the trading and investment side.” The methodology still works for her now - “Most of the funds that I have wound up working for I met through an existing relationship of some sort,” she says – but its chief benefit was to persuade her that her experience and aptitude best equipped her to raise capital for hedge funds. One of the people Brydges had met was an American who was already in the capital introduction business, and he was seeking a partner. “We did the transatlantic thing,” she recalls. “He found funds in the United States, who had no representatives in Europe, and I did the fund-raising for them in Europe.”

The partnership thrived until 2008, when her American partner decided that he preferred to pursue interests he had developed in broker-dealing and corporate capital-raising. At which point MB Advisors was born as a one-woman operation that raises capital not for American hedge funds, but for their European equivalents. “I used to travel to the United States once a month, to interview funds,” says Brydges. “But now I work mostly with European fund managers.” This has worked well, allowing Brydges to get and remain closer to her fund managers and her investors. From a regulatory perspective, it is also much simpler and cleaner than trying to work out whether Cayman-domiciled funds are eligible to sell to European investors – especially at a time when the Alternative Investment Fund Managers Directive (AIFMD) has added flux to complexity. But is that not precisely why it is time to re-locate? Brydges agrees that the AIFMD is almost certain to impose expensive structures that will make European capital unaffordable, and not just for hedge funds, but she is far too wedded to Europe to consider a return to New York or exile in Switzerland. She has lived in London for 25 years, and worked in Europe for all but four of the years that have passed since she started working at Bankers Trust in 1977. But if Marilyn Brydges is not going anywhere, she is still interested in everything, devouring financial news with the appetite of the true financial markets junkie. “I read everything, every day,” she says. That is the difference, you see. Puppet marketers read only what everyone else is reading, and then copy it. Marilyn Brydges is not a puppet marketer.