Australian hedge funds could grow their business much further if they changed the way they approached their client base, Ascalon Capital head of investments Nelson Lam said.
The majority of hedge fund start-ups hit a barrier when they reach $20 million in funds under management (FUM) and are unable to break into the wider market because they do not change their marketing strategies.
"There is a long tail of hedge funds with a FUM of $20 million and that is because of the way they market to the early adopters and innovators; it is very different to the way they [should] market to the pragmatists," he said.
"Pragmatists want things like proof of concepts, they want track record, they want things that give them comfort, whereas the visionaries and early adopters are looking for things that make them stand out from the crowd.
"How many times do I talk to hedge funds and they say: 'I've just come away from a client meeting and they don't seem to understand what we do'?"
Lam's ideas of hedge fund development are based on Geoffrey Moore's chasm-thinking, a marketing framework that draws heavily on the diffusion of innovations theory.
This theory, which finds its origins in French sociological studies of the 1890s, seeks to explain how and at what rate new ideas and technology spread among individuals and organisations.
"Chasm-thinking is an adoption life-cycle [theory], where in the early stage when you launch a new technology, but in this case it could be a new hedge fund, you are going to get some innovators or early adopters. These clients you can get on board probably relatively quickly; they are usually family offices or fund of funds," he said.
"But then all of a sudden the hedge fund reaches a chasm and they can't raise funds and they wonder why."
Lam said he estimated the value of the Australian hedge fund industry at about $30 billion, but admitted to excluding many funds that were generally classified as such.
"The biggest issue for the industry is still labelling. By calling everything hedge funds, you capture a lot of things that shouldn't be counted," he said.
For example, he excludes most 130/30 funds from the hedge fund universe because the majority of the time these funds are run as long-only equity funds.
For a proper definition of a hedge fund, Lam said it was useful to start with risk.
"Hedge funds manage risk; a good hedge fund manager is a good risk manager," he said.
Ascalon, which is owned by Westpac, has been moving away from a general boutique incubation model to specialise in alternative and thematic fund managers.
Its investments include H3 Global Advisors, Continuum Capital Management, Helix Partners and Arkx Investment Management.
It has also launched an Asian arm of the business, which is headed by Chuak Chan in Hong Kong.
