Strongly branded hedge funds are attractive to investors and are attracting the most net asset flows. Once achieved, a strong brand enhances a hedge fund’s ability to raise and retain capital.

Branding is now a critical issue for hedge funds as the marketplace has become increasingly competitive, says Donald Steinbrugge, managing member of Agecroft Partners, a global consulting and third-party marketing company for hedge funds.

He says investors are looking more at a company's brand when choosing which funds to meet and ultimately invest with.

"Because the hedge fund marketplace is becoming increasingly more competitive, one way investors screen hedge funds to determine with whom they are going to meet and ultimately invest in is based on how strong their brand is," notes Steinbrugge.

He says first-time investors particularly are choosing strong brand names in order to reduce "their headline risk".

For Steinbrugge the definition of what is a brand for a hedge fund is evolving. "The definition of a high-quality hedge fund does evolve over time. Right after 2008 the definition of a high-quality brand was focused much more on how big the organisation was, how big the infrastructure, the length of track record but not necessarily on the quality of the track record," he notes.

"In determining a brand, people focus on multiple factors. One is the quality of the organisation, another is the investment team, the investment process and what differential advantages in that investment process the fund has, risk controls, performance and service providers," he adds.

Starting in the fourth quarter of 2010, the definition of a high-quality brand began to evolve and a greater emphasis was placed on potential future performance, according to Steinbrugge. This, he says, coincided with the re-emergence of more experienced and sophisticated hedge fund investors such as endowments, foundations, large family offices and funds of funds.

But many of these experienced investors are beginning to believe the largest hedge fund managers have accumulated too many assets, diluting their alpha over a larger asset base and increasing the investment risk to investors because of the larger bets they need to make in individual securities due to their size.

The focus is shifting to smaller, more nimble managers, particularly as some of the brand-name hedge funds have experienced poor performance in 2011.

This is good news for small and mid-sized hedge fund managers which represent a majority of the firms in the industry, says Steinbrugge. But he warns many of these managers are not attracting assets because the vast majority of money is going to those small and mid-sized managers that have developed the strongest brands.

According to Steinbrugge the biggest mistake most of the lower-quality hedge funds make is not understanding the evaluation factors investors use to select hedge funds and so do not create a top-quality offering. "These factors typically include an evaluation of a firm's operational infrastructure, investment team and their pedigree, investment process focused on their differential advantages, risk controls, performance, service providers and fund terms. A weakness in any of these factors can eliminate a firm from consideration," he says.

Hedge fund performance tends to be a quantitative screen to eliminate a majority of managers. Once performance has reached a certain hurdle, its weighting in the evaluation process is less important than most managers realise, contends Steinbrugge.

He believes the days of a hedge fund participating in hedge fund databases and then sitting back and waiting for the assets to flow are over. "The firms that will be successful in growing their business in the future are organisations that stay highly focused on providing a top-quality offering, clearly articulate their firm's differential advantage across the multiple evaluation factors investors use to selected hedge funds and have a highly professional sales and marketing strategy," he advises.