A decade on, did Man Group’s $1.6bn bet on GLG pay off?
The deal created a hedge fund giant but the transformation did not go as planned
In spring 2010, two of the most powerful figures in the European hedge fund industry unveiled one of the biggest deals in the sector’s history.
Peter Clarke, the chief executive of Man Group, and Manny Roman, co-CEO of GLG Partners, announced that Man Group would buy GLG for $1.6bn.
The contrast between the two groups was striking. Man Group was a quantitative investing specialist with a button-down culture. GLG had plenty of high-profile and high-earning traders whose uniform appeared to be jeans.
But the merger thesis was simple: Man Group wanted to add discretionary hedge fund strategies — where manager skill is relied upon — to its portfolio of predominantly quant funds, which depend on complex algorithms programmed by teams of PhD scientists.
Sales of Man Group’s lucrative structured products linked to its flagship quantitative strategy, AHL, were rapidly drying up. Its fund of hedge funds business had been left reeling after it was found to have invested with fraudster Bernard Madoff. And AHL itself was volatile: after a jackpot year in 2008, it suffered a large loss the following year. GLG, it bet, would bring a steadier — and different — source of profits.
A decade on and the deal has transformed Man Group — just not in the way that its architects had envisaged.
GLG’s value has been written down by more than $1bn, confirming the fears of some investors who always warned the price was too high. Performance has at times flagged, notably in 2014 and 2016.
Yet GLG provided the next generation of Man Group’s executive management team — which has, ironically, turned its back on star managers and driven deeper into quant investing.
Man Group’s current chief executive Luke Ellis, who arrived with GLG and was a close ally of Mr Roman, said recently the industry would no longer rely on “Masters of Mayfair”, referring to the upscale London district where star traders have traditionally worked.
Man Group is Europe’s largest hedge fund manager and under its ownership, GLG’s assets have grown from $23.7bn, at the time the deal was announced, to $33.5bn, although they have shrunk slightly in the past two years. Much of the asset growth has come in long-only funds, which tend to command lower fees than hedge funds, and have benefited from the bull market of the past decade.
“Back in 2010, the Man-GLG merger was seen as the embrace of two struggling giants that had a great future behind them,” said Amin Rajan, chief executive of consultancy CREATE-Research.
Since then GLG’s “star culture has withered on the vine”, he added. Nonetheless, Man Group’s products have expanded, it is using quant processes across its whole business and its client base has changed markedly.
Mr Rajan said: “Its transformation has confounded the sceptics. It has followed a trajectory that few expected at the time.”
In the past decade, Man Group has grown its quant business substantially, with funds that now rank among its top performers. It has raised billions of dollars from clients for its long-only funds, and four years ago further diversified its asset base by adding a private markets business that focuses on real estate and direct lending.
The profound changes at Man Group, which reports its full-year results on Friday, mirror how the wider $3.3tn hedge fund industry has also evolved.
An industry that once ran money for rich individuals and was dominated by highly-paid stars has become a lower-fee business that manages money for big institutions whose risk appetite is less tolerant of the big investment bets of the past. The famous GLG traders such as Greg Coffey, Philippe Jabre and Pierre Lagrange have long since left.
“Things are very different to 10 years ago,” said Mr Ellis. The use of quant has “increased remarkably” in the past decade, notably in trade execution. “Trading has gone from being people hollering down phones […] to computers doing things with other computers,” he added.
Man Group’s reboot was kicked off by Mr Roman, a former Goldman Sachs partner who succeeded beleaguered Mr Clarke as chief executive in 2013, after a testing period of client withdrawals and poor performance at AHL. Despite attempting to diversify through the GLG acquisition, Man Group was in trouble: its shares, trading above 300p in early 2011, had slumped below 70p by summer 2012.
Mr Roman embarked on sweeping cost cuts and appointed Mr Ellis as the company’s president. Sandy Rattray, another former Goldman employee and co-creator of the Vix volatility index, became head of AHL. That helped the division diversify into new strategies, beyond its staple of following market trends, and into new, untapped markets.
“There was quite a lot of rethinking of the business that needed to be done in the first year or two when we got here,” said Mr Ellis.
“The move to increasing the proportion of quant was conscious,” he added. “We definitely re-engineered what AHL was about, and we re-engineered what GLG was about. We’ve broadened out the content for both.”
Over the past decade, AHL’s assets have surged by 40 per cent to about $30bn, reflecting increased investor demand for computer-driven funds. After disappointing returns from some of the industry’s best-known discretionary traders, clients have turned to quant funds. Their various techniques include spotting market patterns or using artificial intelligence to scour satellite imagery and credit card data for trade ideas.
Like many of the big hedge fund firms that have survived over the past decade, Man Group has pivoted its business away from investors such as funds of funds and wealthy clients — many of whom became disillusioned with the sector after the financial crisis — in favour of pension funds, insurance companies and other big institutions.
But these inflows come at a cost. Institutions tend to bargain harder and pay lower fees. Since 2014, Man Group’s management fee margins have dropped by more than a third.
“The criticism of taking on institutional business is that it’s lower fee,” said Mr Rattray, now Man’s chief investment officer. “Well, it might be, but it feels very sticky. It’s slow to come, but often it’s going to be with us for a long period of time.”
Mr Rattray also does not agree with Leda Braga, founder of quant hedge fund rival Systematica Investments, who has described the sector as “very low margin”.
“This is a high-margin industry, it just is, by [comparison with] almost any other industry,” he said.
Regardless of the rebound in Man Group’s quantitative division, some investors believe that the GLG acquisition represents a missed opportunity. GLG’s performance has been patchy and its star has faded. This is in contrast to US multi-strategy firms such as Ken Griffin’s $30bn manager Citadel and Izzy Englander’s $40bn Millennium Management, which have gone from strength to strength since the financial crisis.
Man Group is publicly listed and rivals say it faces tough competition for talent from large unlisted hedge fund groups that operate outside the scrutiny of public markets and can offer higher pay packages.
“Man Group hasn’t been able to emulate the success of the large multi-strats that rely upon a very developed risk-controlled approach to generating returns,” said Jim Neumann, partner at Sussex Partners, which advises clients on hedge fund investments.
Mr Ellis said GLG has been successful in attracting talent and said the fact Man Group is listed makes “zero” difference to its ability to attract the best traders. He said fund managers at GLG have the opportunity to have a career and can run their own funds.
“If somebody wants maximum short-term compensation there are other people who will pay more than we will,” he said. But “you will be out the door very quickly at the moment you have a small drawdown [loss].”
While rival firms “pick the odd one from us”, said Mr Ellis, “we’re doing very well [in the battle for talent]. We get the people we want to.”