Latest post from my role with AllAboutAlpha….
By: Andrew Saunders, AllAboutAlpha.com Editorial Board.
This summer, Man Investments, one of the world’s largest alpha hunters announced a strategic reorganization of its hedge fund investment business. Long associated with systematic trading – AHL was launched way back in 1987 – Man has built a significant fund of funds (FoF) business, with the acquisition of Glenwood investments in 2000 and RMF Investment in 2002 making it one of the largest global investors in hedge funds through FoFs, seed investment and managed accounts.
Earlier this year, Man announced the consolidation of these well-known FOF franchises into one business, Man Investments. Spearheading the transition is John Rowsell, Managing Director who has leadership responsibilities over all business functions. We sought out John to see what drove the reorganization, his views on how a hedge fund investment business should be structured in this new era as well as gather his views on the managed account phenomenon where Man has been an early leader.
John has experience as both an allocator and manager. In the past, he served as CEO of Glenwood, Chief Investment Officer of Man Glenwood, Chairman of the Investment and Management Committees and also managed an internal hedge fund at McKinsey & Company.
Q1: Man Investments recently announced a strategic reorganization. Explain the strategic rationale for consolidating your investment businesses?
Man announced the creation of an integrated fund of fund business in March. The key strategic drivers behind this move are twofold: restructuring to ensure we maintain an obsessive focus on delivering long-term performance to investors; and ensuring that the business evolves to meet changing investor requirements.
Over the years we grew separate fund-of-fund businesses with unique competitive advantages: RMF’s systematic investment process; Glenwood’s bottom-up manager selection philosophy, and Man’s seeding and managed accounts. Structurally it was time to consolidate these processes and support them with Man’s capital, operational and technological infrastructure.
Over the past 12 months it has become clear that our investors are demanding enhanced transparency, institutional quality governance, flexible investment solutions and strong controls over invested assets. Creating an integrated business allows us to apply the full institutional scale and rigor of our global investment management franchise to solving our clients’ problems..
Q2: Under the new structure, you will have management responsibility over the integrated businesses including all business, operational and risk functions. What do you see as your biggest challenges and opportunities?
The lessons of 2008 have accelerated investor interest in managed account investments. The transparency, better liquidity management and control of assets that come from managed accounts have attracted a lot of attention. Some strategies are not appropriate for managed account investments in our view and transparency is only helpful if you have the systems, knowledge and expertise in place. Man has been investing through managed accounts for more than 12 years and is currently working to increase its assets invested through managed accounts (currently about $6 billion) in partnership with underlying managers. Keeping on the leading edge of risk management is essential here. This requires a huge investment of capital and expertise. There are tremendous benefits in having scale to help clients understand the risks and solve complicated investment problems.
Q3: How would you rate the investment opportunities over the next 6-12 months?
There has been a lot written lately about the potential shape of any economic recovery. While market conditions have visibly improved since Q1, we still feel that the risks of a severe dislocation, illiquidity and market failure remain. We have also seen over the course of the year that asset classes have become highly correlated, largely due to the ‘risk on/ risk off’ pattern that has occurred due to shifts in investor sentiment. As a result, we believe there is a high level of uncertainty surrounding the medium-term directional outlook and are therefore cautious about our levels of directional exposure at present. For this reason we are currently favoring liquid and fast-moving managers for the exposures we do take on.
We do however believe that this period of uncertainty and transition has provided strong risk/ return opportunities in other areas. One area is the existence of relative mis-pricing of related assets in global markets, which we believe can be exploited at an intra-capital structure, inter-company, inter-sector and inter-regional level. Practically this translates at present into: Equities, with a relatively low overall net exposure with a bias towards quality and dispersion; Credit, with a significant net long exposure within the limits of underlying liquidity; and Macro, with significant exposures to global macro and CTAs
Q4: Man Investments is a recognized leader in managed accounts, which have attracted considerable attention and popularity over the last 12 months. What key issues should managers and investors be aware of when establishing these structures?
Before considering a managed account solution, investors need to clearly understand their objectives and requirements. Risk management, portfolio construction, strategy exposure and operational control are all important dynamics. Understanding the infrastructure and expertise required to structure, manage and monitor the investment are also essential.
There are three main types of managed accounts solutions in the marketplace against which investors should evaluate their needs: Direct access managed account platforms providing enhanced risk and operational monitoring but in a co-mingled structure giving little or no investor control; Customized, investor-driven managed accounts which provide large institutional investors with full control and segregated assets but which require significant expertise to manage; and Portfolio management driven managed accounts (as typified by the FoF model which allocates across many funds) where the investor sets up a “platform” of managed accounts and co-mingle their portfolios within the platform.
These accounts provide enhanced risk monitoring and full operational control but also require the expertise, resources and experience to set up, monitor and maintain a platform across a diversified set of strategies, styles and managers.
Whereas hedge fund investors need to be clear on the place for managed accounts in their portfolio, managers also need to understand the needs of their investors, evaluate the impact of each solution to their business and implement a solution which is scalable and meets the long term needs of their business. It’s important to keep in mind that running multiple managed account investments can be burdensome for hedge fund managers. Investors with a long track record of investing through managed account investments have a strong competitive advantage in this regard.
Q5: What is your view on the dynamic regulatory environments in the UK, Europe and the US. How are you staying on top of the developments?
From an investment standpoint one of the biggest surprises of the past year was the extent and willingness of Government to intervene in the economy. From global restrictions on short selling to government backstops, bank guarantees, private sector equity injections and the de-facto takeover of the GSEs – Fannie Mae and Freddie Mac – the scale of government intervention was unprecedented. From an investor’s standpoint, this intervention has been one of the most significant factors impacting investment returns and market/ price volatility.
Whilst it was notable that many of the regulatory reviews regarding the financial crisis have agreed that hedge funds were not the authors of the crisis, we are nonetheless in a world where regulation of all financial market participants is being looked at afresh. New initiatives run from the G20 Global Plan for Recovery and Reform, through the US Treasury Framework on Financial Regulatory Reform and review of markets, to the European Union’s draft Directive on Alternative Investment Fund Managers and the UK Turner Review. These proposals cover a wide range of market participants and activities, from executive remuneration to the capitalization of banks to the regulation of investment managers. We believe that the influx of new regulation will be capable of being addressed best by “institutional quality” managers, those with existing experience of operating in regulated environments around the globe, and with the resources to assess and address the changes as they are proposed and implemented.
In addition to being regulated by the UK FSA, Man is regulated in 16 different regions by 21 separate regulatory bodies. This insight and experience is an asset to the investment process and our advice to clients.
Q6: Is the market becoming better informed on the risk/return profile of hedge fund investment strategies?
Apart from managed futures strategies, there is little doubt that hedge funds delivered disappointing returns in 2008. That hedge funds outperformed equities by a wide margin and were a victim rather than a cause of the credit crisis offers little solace. Perhaps even more so than performance, liquidity – or a lack of it – has taken center stage. Some managers took unpopular measures such as gating, side-pocketing or suspending redemptions altogether. In many cases this was justified by market developments and was in the best interests of investors. Nonetheless these events cast a spotlight on some factors that we believe investors really need to pay attention to. These include the capital position, governance arrangements and infrastructure/ expertise of your provider, the level of transparency and liquidity within your portfolio and the degree of asset control you maintain.
To us investing and education go hand-in hand – it is very much a partnership-based approach. While we provide our clients with the benefits of our investment strategy and views, hedge fund and market commentaries and outlooks, we prefer to think about ‘education’ as more of a two-way street. Our approach is to work with clients to develop customized portfolios at the individual manager and strategy levels – through this process we learn a tremendous amount about our clients’ needs and experiences – which in turn impacts our own views and processes. Tailoring portfolios to meet specific risk/ return targets, or to act as completion portfolios to existing hedge fund exposures and accommodate specific investment policies or themes is thought provoking work; and scale helps. Part of the process involves producing optimizations, liquidity and risk analysis, and leveraging deep managed account expertise and legal and financial engineering capabilities.
Q7: What are you hearing from you clients? How are you adding or deploying new talent and resources to service your clients?
At its most basic level, building a fund of hedge funds business is about finding great hedge fund managers and building robust portfolios. Although it might sound simple – this does not mean that it easy to execute well. It takes a huge amount of resources and capital and a lot of talent to run a top tier asset management shop. We are fortunately to have the balance sheet strength of the Man Group behind us which provides us with stable funding for recruitment and retention, innovation and infrastructure. Deploying this strength for the benefit of our clients is more important than ever now. Many of our clients have been feeling the pinch of running their endowments, foundations and plans with fewer resources and smaller budgets. This puts greater responsibilities on the shoulders of remaining staff.
With investors needing to closely examine their overall portfolio liquidity, risk exposures and operational arrangements, this puts tremendous pressure on investment staff to cover all of the bases. This is where deep partners can really provide added value to investors.
Central to the reorganization, we have consciously beefed up our risk management [45 professionals] and quantitative analysis teams [19 professionals] and deepened the bench in hedge fund research [28 professionals] and portfolio management [20 professionals] to ensure that we can fully support our clients in these areas. Our investment staff are based in NY, Chicago, London, Switzerland and Singapore which is critical to our manager sourcing, due diligence and client service functions. We put a large emphasis on attracting and retaining staff with diverse backgrounds in trading, banking, structuring, research and portfolio construction, operations and IR. On the managed account side, we also have a 30 + strong team of professionals dedicated to structuring, monitoring and managing managed accounts.