An integrated business for a changing investment landscape

As markets have changed, so have investor requirements for hedge fund investing. Performance continues to be an absolute requirement and the hedge fund value proposition remains compelling, but transparency, governance and risk management are now, more than ever, at the top of investors' agendas.

Herbert Item, Chief Investment Officer of the
new business (left); John Rowsell,
Managing Director of the new business (right)

The increasing call for transparency applies not just to the liquidity, security and application of assets, but to the way hedge fund businesses themselves are structured and run. What is essential is that investors have confidence in their selection of investment manager and choice in terms of how they access hedge fund returns. The twin principles of delivering confidence and choice underpin every aspect of the new business.

Confidence

In the depth, breadth and access of the teams investing the assets:

• A deep pool of seasoned investment expertise, with an average of 16 years' industry experience across the senior management team.
• Global coverage combined with local market intelligence, with key centres in the US, UK, Switzerland and Asia.
• Access to the world's leading hedge fund managers, negotiated and set up by experienced teams, with developed relationships with the key broker and finance counterparties and over 15 years of trading platform know-how.

In the control of assets:

• Targeted use of managed accounts delivering enhanced control of liquidity, transparency and risk management.
• Strong checks and controls on manager due diligence, monitoring and portfolio performance.

In the way the business is structured and run:

• Enshrines risk management at the same level as investment management.
• Segregates manager seeding and investment allocation.
• Benefits from the security and stability of Man's business model, capital strength and discipline and long operating history in regulated markets worldwide.

Breadth, flexibility and service

The creation of a new business

Reflecting these changing investor requirements, in March 2009 Man announced the launch of a new hedge fund management business. The new business builds the strengths of RMF's infrastructure and disciplined investment process, Glenwood's bottom-up manager selection philosophy and Man's managed account expertise, creating a new, strong, comprehensive and integrated structure, underpinned by Man's capital strength, global distribution capabilities and structuring expertise.

The new business provides flexible and transparent access to the full spectrum of hedge fund investing for both institutional and private investors, from fund of fund portfolios to customised solutions and single manager access. It has been carefully designed to meet current industry concerns head-on as well as prepare for the investor preferences of the future.

Feedback on the new structure from investors, consultants, intermediaries, banks and other stakeholders has been overwhelmingly positive.

The new business will deliver three key benefits to investors:

• confidence
• choice
• efficiency

Choice

Choice operates at a number of levels.

Choice of content

Investors are increasingly looking at hedge funds not as a single homogenous block but as a range of different strategies, across a liquidity spectrum. While some styles such as equity long/short, global macro and managed futures suit frequent liquidity, others such as distressed may in fact lend themselves to private equity-style levels of liquidity. There is investment opportunity to be captured right across this spectrum, but investor sensitivity to illiquidity will dictate appetite across the range. The current prevailing atmosphere of investor caution suggests that portfolios modelled at the more liquid end of the spectrum are likely to benefit in the shorter term.

Man is well placed to cater for both the current and longer term preferences. The new business creates a more efficient structure to deliver the strength and breadth of the content of the whole firm to the end investor. An early example of a product from the new business is an open-ended combination of managed futures and global macro managers which will have access to broad manager pools and managed account relationships right across Man to create the optimal portfolio for a given risk/return objective.

We are well known for our leading position in the managed futures space, but this is complemented by recognised strengths across the style spectrum - for example, in March 2009 we won the Long/Short Equity Europe category for the second year running at the industry-recognised InvestHedge awards in New York.

At a time when many distributors are pointing to a dearth in supply of appropriate hedge fund product, we have at our disposal a broad range of content where we have deep understanding of the underlying strategies, facilitating the creation of the right products, for the right market at the right time.

Choice of access

In the same way that the shades of the content spectrum are becoming more defined, so varying degrees of investor appetite for intermediation are becoming more distinct. At one end of the spectrum are institutional investors with developed in-house hedge fund monitoring capabilities perhaps seeking single manager access in a managed account format, alongside a prescribed level of reporting; at the other mass affluent investors looking for complete engineered products delivering attractive risk returns within a guaranteed framework.

Man has a long history of creating relevant portfolio blends, tailored solutions and structured products in a range of formats (onshore and international, closed and open-ended etc), but has typically delivered a single package of fiduciary services (encompassing sourcing, diligence, management and monitoring, reporting, use of managed account technology and so on). The structure of the new business will give us even greater flexibility to consider offering a more unbundled set of services which cater to specific intermediation preferences and monetise particular components or sets of components, provided that the associated economics make sense for both the investor and Man. It also provides a framework to think more creatively about customising basic core offerings, for example by adding risk overlays and portfolio specific hedging programmes.

Maximising efficiency

In bringing together the best investment management talent and processes from across Man's fund of fund businesses, we have taken advantage of the opportunity to focus, refine and simplify. We have distilled the strongest elements of sourcing, due diligence, portfolio and risk management in a way which has preserved geographic reach and depth and continuity for existing mandates, but eliminated duplication and improved co-ordination in a new single entity. We would expect there to be some relatively modest savings through 2009/10, but importantly we believe that we will have refined our ability to convert promising content into attractive product swiftly and efficiently, which will contribute positively to margins over time.