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Wednesday, August 28, 2013

Tom Florence Does Alts Differently

Reported by Tommy Fernandez

Tom Florence, chief executive of 361 Capital, is a big believer in the power of using mutual funds to market hedge fund strategies, but he warns that the process is a lot harder than many alt firms expect.

During a recent interview with MFWire, he had this to say on the subject.

These places are going to start funds because they can, not because they know what they are doing. They are going to get frustrated very quickly. It will get harder and harder and harder. All of these firms with just $50 or $60 million, they will be unprofitable. They were be opportunities to aggregate these funds into one fund through adoption. I see that coming in the next five years.

Florence has plenty of experience on the subject. He first started his career at Merrill Lynch, and then served as a vice president at Fidelity Institutional Services and a managing director at PBHG Funds. As a managing director at Morningstar, Florence was responsible for launching and developing the company's $20 billion asset management business. He was also a managing director and founder of Dividend Capital Group, and was a trustee on Janus's board.

After Dividend, Florence wanted to get back into mutual fund country, but also forge his own path at the same time.

One Degree More

So, Florence bought into the predecessor to 361, a hedge fund firm run by Brian Cunningham, who now serves as president and chief investment officer of the current shop. Florence bought into half of the firm in 2009 and then started a two-year process devoted to developing a mutual fund complex.

The first step was to develop a brand. They were looking for something that centered around the concept of "circular, cyclical." Three rounds with an outside branding firm were unsuccessful, so Florence and his colleagues decided to go it alone.

Inspiration hit Florence while he was in bed at 5 a.m. He first came up with the idea of something involving 360. He then researched the name and found that it had already been claimed by a number of financial firms. Then he had another bolt of inspiration.

"What if we do it one degree better? What if we go one degree beyond everyone else?"

And a brand was born.

No Stars in this Sky

When it came to creating the investment brains of the firm's first fund, Florence decided to go quant, with a vengeance.

Florence likes to avoid the star PM school of fund management, instead preferring to "hire brilliant people as quants to develop models."

"Otherwise you can be held hostage by PMs," he says.

The black boxes, which don't threaten to leave for better salaries, have done just fine.

For example, 361's first '40 Act product, the 361 Managed Futures Strategy Fund was rated the top-performing mutual fund in its category by Morningstar for the 12-months ending June 30, 2013.

The fund, launched in January 2011, reached $325 in AUM at the end of June.

"What it thrives on is volatility. Wouldn't you like something that when you hit those air pockets, those periods of shock, you have a buffer in your portfolio," Florence says.

No Rolodexes, Please

Florence's next challenge was developing a sales force.

Florence is adamantly against the philosophy of "buying rolodexes," instead he prefers to develop sales talent from within.

"That [buying rolodexes] is just a myth. It just doesn't work that way, so why pay for it?"

Instead, Florence and his colleagues focused on hiring people with some experience, but then training them ferociously from within. This project included developing 361's own proprietary sales training process.

It's not about talking about product. It's about how do you connect with the advisor and what is going on in their life? We built our program and all of our sales guys went through it. it is a common language in our firm. Everyone is on the same page.

The firm now has five sales people and a sales manager, Josh Vail.

Florence said that "we're pleased right now with the five we have," but said that the firm may add some sales support, some internal sales people next year.

No Magic Bullet

His firm now has relationships with well over 200 advisors. They developed these relationships the old-fashioned way.

"A lot of it is just hand to hand combat. Calling and calling. The secret sauce is pure elbow grease. There really is no magic bullet," he said.

Florence and his team developed their advisor database by first buying information from MeridienIQ, and spending a lot of time and effort to cleanse and refine this information.

Florence prefers a hybrid model for sales, with his five sales people spending 70 percent in the office and 30 percent in the field.

They do lot of direct marketing through email campaigns, monthly webinars, looking to catch the interest of advisors. Send papers to advisors articulating their investment strategies and opinions about the next 12-months.

The firm has also created a weekly research briefing with former Janus executive vice president and PM Blaine Rollings who is now a managing director and senior portfolio manager at 361.

They also work with blogger Josh Brown, TheReformedBroker, who retweets it, and features it on CNBC. The firm's hashtag: 361Capital.

Weekly and daily, they blast out emails to the advisor base that they have. Advisors voluntarily register for the webinars. Advisors come to their site, ask for info via info@361capital.com and ask to be signed on.

The Knowledge Pyramid

Who are they looking for in an advisor? In short, the ideal advisor would have more than $100 million in assets, is currently using alts, understands alts, and has discretion.

But to better understand Florence's thinking towards advisors, consider his "knowledge pyramid of alternatives.

At the top of the pyramid are the high-end advisors who have discretionary assets are doing a lot of alts.

"The home offices at MBS, Merrill, and so on, they have a huge amount of dough, this today where the bulk of alts sit. They are also buying individual strategies. They are engineers, they are going to create their own portfolios," he said.

The middle of the pyramid would have the reps who are maybe following the model or strategic advice coming down from the firm. They are following some kind of recommended portfolio modeling. Rep-based and more research. Could be discretionary, could be non-discretionary. They are starting to adopt.

The bottom of the pyramid, where most advisors still reside, would have zero allocation to alts. There are much less sophisticated, managing smaller pool. When they do buy alternatives, it might be a single fund, one size fits all multi-strategy product.

Florence and his team are focusing on the advisors at the top of the pyramid. They are now also working with the execs at wirehouses who develop model portfolios.

Part of their outreach efforts involves cold -alling to advisors, during which Florence's wholesalers gather introductory data on these firms. For example, the sales staff will ask the advisor whether the firm invests in alts, whether they use individual strategies and have at least $100 million in assets.

If the advisor meets the above criteria, then the sales people will then push for additional conversations.

The Farmer's Pond

Make no mistake, Florence takes the wirehouses and fund platforms very, very seriously. For example, 361 has a growing relationship with UBS, which he describes as "very exciting. They currently have relationships with 50 such platforms.

"UBS really believes in alts. They really like our fund. We have a lot of opportunities to further partner with them," he says.

However, he warns burgeoning funds, just getting on a platform doesn't guarantee anything. Fundsters still have to work to sell their products. It is also unrealistic, he said, to expect sales help from a platform. If the executives at any platform are seen to be helping any one firm, Florence says, they would then be expected to provide the same help to all the firms on the platform.

To illustrate his point, Florence uses the image of fishing in a farmer's pond.

"You want to fish on a farmer's pond. You knock on the farmer's door and as. After months and months of knocking, you finally get permission. But now you have to actually catch the fish," he says.

Chopping Wood

It just takes time to work through the legal process, the on-boarding process, Florence says. That is the biggest challenge to working with these firms.

"In this business, when you start out as a small firm, it is a lot of chopping wood to get any kind of traction. You have to call each one, go door by door to get the criteria from each of the platforms," he says.

Of course, each platform has its own selling agreements and other legal documents and assorted criteria, which can vary a bit from platform to platform.

However, he says, "once you get past $250 million and a one-year track record, you are in pretty good shape across the board." 

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