Innovation is often introduced at industrial levels before trickling down to consumers. You may recall the IBM System/360 mainframe computer featured in Season 7, Episode 4 of Mad Men, which was supposed to have taken place in 1969. It took what would have been 15 more years before Apple introduced the Macintosh to much fanfare with its Super Bowl commercial promising that 1984 wouldn’t be like Orwell’s 1984.
But sometimes with innovation, the opposite occurs. For example, in June’s technology quarterly, The Economist detailed the reasons that drone technology has actually trickled up to industrial levels:
- Fierce competition in consumer markets have driven down costs and improved reliability in a rapid time period.
- Regulation from the FAA has inhibited the deployment of commercial drones. This fast-moving technology has far outpaced Fed’s ability to regulate it commercially.
- The drone industry experienced a great deal of consolidation, leaving DJI with 70% of market share.
Hedge fund managers should take note:
- Financial technology has precipitated a new level of competition that has driven down costs and improved transparency for retail investors.
- The SEC’s Rule 506(b) of Regulation D previously inhibited general solicitation, or marketing, for hedge funds.
- A decade-long bull market that was largely devoid of volatility has made it harder to justify a 2/20 fee structure, leading to broad levels of consolidation.
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There is one major difference between the commercial use of drones and the ivory towers of LP land: the JOBS Act. Passed in 2012, it repealed the ban on general solicitation for hedge funds and private equity firms. Five years later, however, most hedge funds have yet to develop a marketing strategy, let alone employ the use of digital tools.
Retail investors, particularly with the use of robo-advisors, have popularized slick user interfaces and personalized digital communication. This is growing more ubiquitous for reasons that may not necessarily be apparent on the surface of a slick UX. As Harvest CEO Peter Hans recently opined in FinAlternatives, "Transitioning from reactive to proactive digital engagement is a big leap for many managers. But while it can be daunting, it is also paramount to growth and even survival. Reactive marketing and IR serves only to limit damage, or play defense. This is fine if everyone else is just playing defense too, but market leaders are now also playing offense."
Just like drone technology moving into industrial circles, digital marketing must trickle up into the hedge fund space. With competition intensifying due to fintech and macro trends, hedge funds that prioritize user experience and client engagement will find it easier to attract and retain clients.