The Odd Couple

Can the marriage of systems-driven Man Group and individualistic GLG Partners make the worlds rst $100billion hedge fund? By Neil Sen

56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

hedge funds

m a r c h 2 0 1 1 i n s t i t u t i o n a l i n v e s to r

Man Group CEO Peter Clarke (left) brings management and marketing muscle to

the table; Pierre Lagrange leads GLG Partners stable

of star managers

Can the marriage of systems-driven Man Group and individualistic GLG Partners make the worlds rst $100billion hedge fund? By Neil Sen photographs by Jonathan worth

56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 m a r c h 2 0 1 1 i n s t i t u t i o n a l i n v e s to r

As A former m&A bAnker, mAn group Ceo peter Clarke knows the importance of integrating operations thoroughly after a merger. So following Mans blockbuster purchase of GLG Partners last year which created the worlds largest hedge fund manager, with more than $69billion in assets Clarke was determined to bridge the yawning gap between GLGs brash entrepreneurial culture, which gives free rein to its star portfolio managers and lets staff dress casually at its office in Londons swank Mayfair district, and the buttoned-down corporate atmosphere at Man, whose core business relies on finely honed computer systems rather than individual personalities and whose City of London office brims with suits.

One of the biggest cultural questions we faced as a result of the merger with GLG was whether or not jeans should be allowed in our offices, Clarke says in a recent interview in Mans boardroom, sporting a well-cut dark gray suit and a crisp white shirt with no tie. So he put the matter to a vote in the management com-mittee, and now people are allowed to wear jeans in Mans Sugar Quay building as well as in GLGs Curzon Street office, he says. The change has yet to filter down to the shop floor, though. Formal business attire still predomi-nates at Mans headquarters, while many of GLGs staff including principal Pierre Lagrange, whose scruffy goa-tee and shoulder-length hair make him look more like a rock star than a fund manager appear to regard jeans as part of their uniform.

The sartorial contrast may seem trivial, but its symbolic of deeper differences in style and business practices at the two outfits. Over two decades beginning in the mid-1980s, Man transformed itself from

a commodities trading firm into the worlds largest hedge fund manager by acquiring managed-futures traders and fund-of-funds operations and then selling their products aggressively through a high-powered marketing network, mostly to retail clients in Europe and Asia. Its main unit, $23.6billion-in-assets AHL, is a virtual black box, relying on quantitative formulas refined by armies of Ph.D.s to follow and profit from price trends in everything from currencies and commodities to stocks and bonds. In an industry defined by larger-than-life personalities such as Steven Cohen, John Paulson and George Soros, Man is an anomaly. Cognoscenti in the City and on Wall Street would be hard-pressed to identify a single one of its fund managers. The names that come to mind Clarke and his predecessor Stanley Fink are both lawyers by training.

GLG, on the other hand, is a hedge fund managers hedge fund. Founded by a trio of former Goldman Sachs Group private client bankers, the firm fostered a star culture by attracting elite propri-etary traders from leading investment banks and giving them the freedom to follow their own strategies. The formula was both wildly successful institutional investors enamored of GLGs trading gurus have swelled the firms assets to more than $30billion and inherently unstable: The departure of one star trader, Greg Coffey, three years ago triggered outflows of several billion dollars.

Rather than try to meld these differences, Clarke hopes to exploit them. A lack of internal investment management expertise was inhibiting Mans growth potential, he contends. It was increas-ingly apparent that clients, especially those in Asia, wanted direct exposure to a discretionary single manager, he says. Clarke plans to feed that appetite by marketing GLGs suite of funds through Mans distribution network. He is also teaming Mans quants with GLG managers to come up with an array of new products designed to appeal to institutional investors. He believes that combining the very different business models of Man and GLG will jump-start growth that, in effect, one plus one will equal more than two.

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 m a r c h 2 0 1 1 i n s t i t u t i o n a l i n v e s to r

gLg partners has thrived on its ability to recruit a stellar

array of fund managers, usually by tapping hotshot proprietary traders at major investment banks. this assembly of talent is the real prize that Man group sought with its acquisition.

what lures these star traders, who would have no shortage of alternative employment, to gLg? the firm offers them con-siderable autonomy to manage money, the opportunity to amass even more wealth and the chance to work with one another. one of the big attrac-

tions of working here is that you get to sit with, and feed off, very smart people, says noam got-tesman, the new yorkbased head of gLgs U.s. business.

this is no empty boast. Con-sider the co-heads of gLgs emerging-markets strategies, who jointly manage $3 billion. Karim abdel-Motaal has a ph.D. in economics from harvard Uni-versity; bart turtelboom earned his economics doctorate at Columbia University. the duo, for-mer emerging-markets prop traders at Morgan stanley in Lon-don, had considered launching their own fund but chose to go with gLg because it offered the freedom to run their own strategy and the support structure of a larger firm. they arrived in sep-tember 2008 to replace greg Coffey, once the brightest of

gLgs stars, who at one point managed almost a third of the firms money. the pair quickly delivered results. they generated a return of 24.6 percent in 2009, behind the 35 percent rise in the hFrI emerging-markets global index but outperforming many other emerging-markets funds, including Coffeys at Moore Capital Management (where he now works), which was up 20.1 percent. the gLg fund climbed a further 12.6 percent in 2010, slightly ahead of the indexs 12.13 percent rise.

Driss ben-brahim, a former partner and emerging-markets prop trader at goldman sachs group, has delivered similarly impressive returns in macro strat-egies since joining gLg in 2008. his $500 million atlas Macro fund, which invests across all

Talent show: GLG succeeds by attracting top traders and keeping them happy

Ahedge funds

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10

Actually, Clarke has a far bigger number in mind. He is con-fident that the newly fortified Man Group can become not only the worlds first $100billion hedge fund but the first to surpass $200billion. Not that he comes out and says it directly, but its implicit in his outlook. I anticipate the hedge fund industry in five to ten years will be three to five times the size it is now, and I expect Man to grow commensurately, he tells Institutional Investor.

Is the investment world ready for a $200billion Man? Industry executives and analysts have their doubts. Many funds have found it hard to maintain good returns as their size has grown large relative to the markets in which they invest. When James Simons launched Renaissance Technologies Institutional Equities Fund in 2005, for example, he boasted that the strategy could theoretically manage $100billion and still beat the market handily. Actual performance has lagged, though, and the fund currently has slightly more than $4.6billion in assets.

Its very difficult to look that far ahead, but those are very optimistic figures, one prominent London hedge fund manager says of Clarkes forecast. Its not the sort of thing I would say if I planned to be around in five or ten years time. That view is shared by Alexandre Pigault, head of research at hedge fund consulting firm Allenbridge Group.Its very difficult to forecast where the industry will be in five to ten years time, but three to five times growth is very optimistic, he says.

Some are less skeptical. Clarkes projection is a little aggressive but not far-fetched, says Mark Yusko, CEO of Morgan Creek Capital Management, a Chapel Hill, North Carolinabased invest-ment manager and adviser. While $100billion sounds like a huge amount of money, relative to the size of global financial markets at $50trillion-plus it is not that significant. There are plenty of great firms that can generate alpha, and we do believe that a firm of that size could achieve solid returns.

When asked about the potential impact of size on returns, Clarke insists he isnt fixated on the sheer volume of assets alone.

Our focus is on providing superior risk-adjusted returns, and if we continue to do that, we should be capable of growing com-mensurately with the market. Were not chasing volume for its own sake. We are very concerned to protect existing investors return expectations through careful use of leverage and recognizing capac-ity constraints in some underlying strategies.

Lagrange offers a somewhat tempered assessment of the new companys growth potential. He contends that GLG faces few expansion constraints because it is a collection of 40 relatively small funds that are closed when they reach capacity. The firm recently closed its Alpha Select strategy, which is managed by John White and invests in U.K. equities, when it reached $550million. Lagrange believes GLGs managers could boost assets by two thirds, to at least

$50billion, in the next few years under Mans parentage. There is a massive opportunity here to create the best of breed, he says.

Clarke and Lagrange have yet to prove they can deliver on that vision. The enlarged Man Group attracted just $100million of new money into alternatives in the fourth quarter of 2010 the first quarter after the merger while losing a $1billion long-only mandate from an undisclosed sovereign wealth fund shifting out of European equities.

The lack of overlap between the two firms means they havent had any client defections so far, although some customers are keep-ing a close eye on the group. We chose Man on its own strengths, and weve been very impressed with the service levels so far, says

asset classes globally, was up more than 25 percent in 2010. ben- brahim recently launched the onshore atlas Macro alter-native fund, a version that com-plies with the European Unions UCIts III mutual fund rules and is open to European retail inves-tors with a minimum commit-ment of $1,000.

steven roth enjoyed a strong reputation as the head of convertibles at Deutsche bank before he arrived at gLg in 2005 to help fill the big boots left by philippe Jabre, whose dab-bling in convertibles racked up large profits for gLg but attracted hefty fines from U.K. and French regulators for using nonpublic information. roth manages more than $3 billion of assets in convertible arbitrage and long only funds, and has

delivered average returns of more than 10 percent a year to investors over the past five years. not that the ride has been smooth: roths strategy dropped 54 percent in 2008 before rising 115 percent in the next 15 months to set a new high-water mark. he told Institutional Investor last year that he took advantage of depressed valuations to buy high-yield and distressed paper as well as subordinated financial paper and U.s. real estate invest-ment trusts.

gLg deploys its stars across more than 40 multistrategy funds, which typically can invest in a range of asset classes. our mul-tistrategy approach gives us flex-ibility, says gottesman. once a client has made his asset alloca-tion decision, its our responsibility to pursue returns by whatever

strategy necessary. Last year, for example, many investors moved away from distressed investing because of the economic recov-ery, but galia Velimukhametova generated a 36 percent return in her European distressed strategy, easily beating the 11.26 percent rise in hFrIs distressed/restructur-ing index.

gLgs alternative funds are invested across a range of asset classes, including $6 billion in fixed income and convertibles and $8 billion in equities. some-what surprisingly for a firm of such bold traders, nearly half of gLgs assets $13.3 billion are in long-only portfolios, a legacy of the 2008 acquisition of socit gnrale asset Managements U.K. business. gLg regards this as a positive factor, not something that dilutes the firms focus. Long-

only funds give us a chance to compete with mainstream asset managers, and it boosts our assets under management and fees, says gottesman.

the diverse range of products and managers gives gLg greater stability and reduces the risk of a star trader departing no small consideration for a firm that was shook by the depar-tures of Jabre and Coffey. we now have a balanced business, and no single group accounts for a disproportionately large amount of the business, says gottesman. Fellow principal pierre Lagrange insists that gLg knows how to keep its talent happy: we have a star system here, but theres absolutely no doubt you can have teamwork and a process-oriented firm alongside it. n.s.

I anticipate the hedge fund industry will be three to ve times the size it is now, and I expect Man to grow commensurately. Peter Clarke, Man group

Emily Porter-Lynch, manager for absolute-return strategies at the U.K.s Universities Superannuation Scheme, which awarded Man a $1billion managed-account mandate in early 2010. But, she adds, mergers can bring about management changes, so were monitoring events closely, as we dont want the service to be affected.

Clarke also runs the risk that his new partners could soon depart, taking much of the value of the acquisition with them. GLGs senior managers have quit large insti-tutions twice in search of greater autonomy: They left Goldman in 1995 to set up their hedge fund business under the parentage of Lehman Brothers Holdings, broke away from Lehman in 2004 and in 2007 floated the firm on the New York Stock Exchange.

GLGs three principals Lagrange, who manages $2billion as head of Euro-pean strategies; New Yorkbased Noam Gottesman, who heads up the U.S. business and manages a $700million global oppor-tunities strategy; and Emmanuel Roman, the London-based co-CEO who now serves as COO of the enlarged Man Group owned close to half of GLG and received a total of $700million in Man shares in the $1.6billion takeover; they cant sell the shares for three years. The three insist they are fully committed to making the deal work. Even when the lockups expire, I expect to still be here, says Lagrange. I love what I do. I have just compiled a 10 per-cent net return in the European long-short fund over the last ten years, and my goal is to improve on that over the next ten years. Gottesman says hes enjoying the increased freedom to focus on managing money, which was one of the main attractions of the deal for GLGs fund managers. Im very happy doing what Im doing, driving performance and being less involved in day-to-day management, he says.

Clarke seems confident in the chemistry he has with his new partners. I believe the three principals are enjoying themselves and that they will stay longer than three years, but they are not enslaved or inden-tured, he says.

Lagrange and Roman sit on Mans nine-strong management committee, which meets every six weeks, ensuring that they have a voice in strategic decisions. The body also includes Clarke; Tim Wong, CEO of AHL; sales and distribution chief Chris-

toph Moeller; Luke Ellis, head of Mans Multi-Manager business; Stephen Ross, global head of product structuring; finance director Kevin Hayes; and human resources chief Michael Robinson. One of the com-mittees first acts was to establish the Man Systematic Strategies group led by Sandy Rattray, who had headed systematic strate-gies at GLG, and including AHL staff to develop new quantitative products comple-mentary to those of AHL. The committee has also approved the launch of the first real Man-GLG hybrid product, a fund that combines exposure to AHLs managed-futures strategy with exposure to Gottes-mans global opportunity portfolio.

Will all of this work? Several forces in the industry provide grounds for optimism. For one thing, scale appears to be increas-ingly powerful in the hedge fund business. Roughly 80 percent of new inflows in 2010 went to firms managing $5billion or more, according to Chicago-based Hedge Fund Research. With capital inflows rebounding strongly and compliance costs growing, that trend toward bigger funds looks likely to continue. Hedge fund assets have effectively recovered from the more than 30 percent collapse that took place during the worst of the financial crisis, hitting $1.92trillion at the end of 2010, just below the precrisis peak of $1.93trillion, according to HFR. A recent survey of 2,300 institutional inves-tors by Preqin, a London-based alternative investments data provider, found that pri-vate pension plans increased their average allocation to hedge funds from 5 percent in 2007 to 9 percent in 2010, while public pension plans raised their allocation from 4 percent to 7 percent.

Not surprisingly, merger activity among funds is on the rise. The number of transac-tions involving alternative asset managers nearly doubled last year, to 102 globally, according to consulting firm Freeman & Co. Some of them, like Man-GLG, were substan-tial. TPG-Axon Capital Management, an $8billion New York fund founded by Dinakar Singh, acquired London-based Montrica Investment Management, a $1billion plus firm established by Singhs former Goldman Sachs colleagues Andrew Metcalfe and Svein Hogset, and Fredrik Juntti.

Any change in control at a hedge fund entails risk, of course. In September 2007, Florian Homm, founder of Absolute Capi-

tal Management, quit the then$3.2billion hedge fund firm in a dispute over compen-sation. Some deals, however, work out sur-prisingly well. When JPMorgan Chase & Co. acquired Highbridge Capital Manage-ment in 2004, many industry executives bet that the hedge funds two founders, Glenn Dubin and Henry Swieca, would decamp as soon as their five-year lockup period expired. Swieca did indeed leave in 2009, but Dubin remains as CEO of the fund. With JPMorgans help in diversifying the business and bringing in more institutional money, he has increased Highbridges assets to $27billion from $7billion at the time of the deal.

Clarke will be only too happy if Man can grow at a similar pace following the GLG deal.

mAns offICes In sugAr QuAY, A few

paces up the Thames from the Tower of Lon-don, contain two bottles of 18th- century rum, a reminder of the groups origins. Founder James Man started a sugar broker-age in 1783, branched into other commodi-ties and won an exclusive contract to supply Britains Royal Navy with rum. The core trading business of the company, renamed ED&F Man in the 1800s after Jamess grandsons, would remain little changed, except for scale, for nearly two centuries.

In 1983, Man, which had recently expanded in commodity futures, bought a 50 percent stake in Mint Investment Management Co., a New Yorkbased com-modities trading adviser founded two years earlier by Lawrence Hite, an exponent of game theory in trading futures, and com-puter scientist Michael Delman. Mint had generated returns of more than 20 percent annually in its first two years, and after Mans investment similarly strong perfor-mance grew the business to nearly $1billion in assets by the end of the decade.

That growth gave senior executives at Man a taste for more CTA action. In 1989 the firm bought a 60 percent stake in AHL, a London-based managed-futures trader founded two years earlier by Michael Adam, David Harding and Martin Lueck. Fink, the future CEO who was then Mans head of M&A, recalls having a tough battle to persuade the board to invest in AHL, even though the purchase price was less than 10million ($16million). It was very low-key in the early days, says Wong,

m a r c h 2 0 1 1 i n s t i t u t i o n a l i n v e s to r

5 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

hedge funds

who joined AHL as a University of Oxford engineering graduate in 1991, when it was managing $300million. Man took full con-trol of AHL in 1994, the year the company floated on the London Stock Exchange, and the fund grew rapidly to become Mans core business. The Asian crisis proved the worth of CTAs, says Wong. But while some CTAs ran into trouble when they grew to $2billion or so of assets, AHL always planned ahead, redesigning models and adapting systems, so it was able to cre-ate capacity. AHLs growth also benefited from a prescient move by Colin Barrow, the executive in charge of Mans managed-futures business, to base his sales operation in the village of Pfffikon, 20 minutes south of Zurich, and offer up-front fees of as much as 5 percent to entice Swiss private banks and independent financial advisers to dis-tribute AHL products to wealthy clients. Switzerlands low-tax environment and status as a center of private banking made it an obvious choice, says Barrow.

Under then-CEO Harvey McGrath and then-CFO Fink, Man branched out beyond managed futures in 1996 by set-ting up a joint venture with Chicago-based fund-of-funds Glenwood Capital Manage-ment. Two years later it acquired the Swiss fund-of-funds manager RMF Investment Group. The beefed-up alternatives business became a powerhouse under Fink, who moved up to CEO in 2000. From 2002 to 2007, Mans underlying earnings per share, excluding performance fees, grew at a com-pound annual rate of 34 percent and assets under management swelled to $61.7bil-lion. In 2007, Fink moved to make Man a pure asset manager by initiating the sale of its brokerage subsidiary, which changed its name to MF Global Holdings and is now run by former Goldman chairman and New Jersey governor Jon Corzine. He also held exploratory merger talks with GLGs principals, seeing their single-manager portfolios as a good diversification move for Man. The discussions broke off, however, when Fink developed a brain tumor and resigned suddenly that year. (He recovered and came back to the industry in late 2008 as CEO of a small commodities and macro hedge fund, International Standard Asset Management, founded by a former GLG trader, Roy Sher.)

Mans fortunes took a nosedive dur-

ing and after the financial crisis. AHLs trend-following style profited from volatile markets in 2008; its strategies were up by 33 percent, on average, for the year. AHL performed badly in 2009, however, as the Federal Reserve Boards quantitative eas-ing policy calmed volatility. Its strategies were down 17 percent for the year, a stark contrast to the 25.2 percent rise in the Stan-dard & Poors 500 index. Although AHL rebounded 14.8 percent in 2010, it was still 3.7 percent below its high-water mark, on average, depriving Man of performance fees. Those fees had plummeted to $97mil-lion in the year ended March 31, 2010, from $358million a year earlier.

Mans fund-of-funds business suffered even bigger losses. RMF lost $360mil-lion in the collapse of Bernard Madoff s Ponzi scheme and was down 15.5 percent for the year ended March 31, 2009. Mans

Glenwood unit fell 16.4 percent that year, and Man Multi-Strategy dropped 36.7 percent. Total assets in the fund-of-funds business dropped by $17billion in the 12 months ended March 31, 2009, to $26bil-lion. Investor outflows triggered a further $12billion decline in the following year. Mans once high-flying stock plunged nearly 75 percent in little more than seven months, to a low of 152.6 pence in early-March 2009, and pretax profits fell 27 per-cent in the 12 months to March 31, 2010. Clarke, who had succeeded Fink as CEO in April 2007, urgently began looking for an acquisition or strategic partnership to stop the bleeding and turn around the busi-ness. His search led almost inevitably to GLG at the end of 2009. Advisers didnt have to bring the two sides together because Man knew GLGs principals well from the exploratory talks Fink had conducted in 2007. Mans fund-of-funds unit had also been an investor in some of GLGs funds.

GLG had reasons of its own to consider a deal. The firm had been one of the fastest-growing European hedge funds since Got-

tesman, Lagrange and Jonathan Green left Goldman in 1995 to launch the business. Lagrange, a Belgian, focused on Europe; Gottesman, a U.S.-Israeli dual citizen, con-centrated on the U.S. market; and Green, a Briton who had started his career as a broker at James Capel & Co., looked after the U.K. market. (Green left in 2003 and now lives in semiretirement in Monaco, managing his own investments.)

The triumvirate built a distinctive ros-ter of multistrategy funds by recruiting a number of elite traders from the prop desks of top investment banks. One of those recruits, Philippe Jabre, a Frenchman of Lebanese origin who traded convertible bonds at a subsidiary of Banque Nationale de Paris, joined GLG in 1997 and ran a market-neutral fund that gained an aver-age of 20.9 percent a year, after fees, from 1998 through 2005. With a suite of funds

generating strong returns, GLG grew its assets from less than $4billion in 2002 to nearly $25billion a third of it long-only in 2007. It raised about 50 percent of its funds from institutional investors.

The firms first stumble came in 2005, when the U.K.s Financial Services Author-ity began investigating Jabre for allegedly using nonpublic information about a 2003 convertible bond issue by Sumitomo Mitsui Financial Group to short the companys shares before the offering. Jabre quit GLG in February 2006 and now runs his own $4billion hedge fund firm, Jabre Capital Partners, in Geneva. His departure left a sizable hole at GLG, considering that at his peak he managed 30 percent of the firms assets and produced 40 percent of its prof-its. Shortly afterward, the FSA fined Jabre and GLG $1.4million each over the SMFG bond issue. Later that year the Autorit des marchs financiers, the French market regu-lator, fined GLG $2million for similar abuses relating to a bond issue by the telecommuni-cations equipment maker Alcatel. Jabre and GLG both denied any wrongdoing.

Im very happy doing what Im doing, driving performance and being less involved in day-to-day management.Noam Gottesman, gLg partners

5 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

To strengthen the firms manage-ment and tighten internal controls, GLG recruited Roman in 2005 to become co-CEO alongside Gottesman. There was a need for someone senior who wasnt managing money is how the Frenchman diplomatically puts it. Roman, a close friend of Gottesman, had spent 18 years at Gold-man Sachs, most recently as global co-head of equities and prime brokerage. Roman helped get performance back on track, and in 2007, GLG listed on the New York Stock Exchange through the reverse takeover of a special-purpose acquisition vehicle, at $11 a share, valuing the business at $3.4billion. Lagrange, Gottesman and Roman collec-tively pocketed a cool $1.38billion, nearly half of it in cash and the rest in shares.

The good times didnt last long, though. In 2008, Coffey, GLGs star emerging-markets fund manager, announced he was leaving to set up his own fund. (He would eventually join Moore Capital Manage-ment.) Coffey, a former Bank Austria and Deutsche Bank prop trader, had produced returns of 50 percent and 60 percent in 2006 and 2007, respectively, and was man-aging $7billion of GLGs $24billion in assets shortly before his announcement. His departure, and the market turmoil of 2008, sent GLG reeling. The stock price had col-lapsed to $2 by December 2008. Assets under management dropped to $17.3bil-lion in November of that year, threatening

to put GLG in breach of a covenant on a $570million loan from Citigroup. To gain some breathing space, GLG bought the $8billion-in-assets U.K. arm of Socit Gnrale Asset Management in December 2008. But the scare prompted Gottesman, Lagrange and Roman to pursue a strategic deal. They began talking with Mans Clarke in late 2009.

We knew Man as a client, and wed had talks in 2007 that went very well, explains Roman. So it wasnt surprising that we

started talks again in 2009 once market conditions began to stabilize. We werent under any pressure to do the deal we could have stayed independent. But strate-gically, it makes sense. Lagrange says the deal enables him and his partners to focus their energies on the things they do best. We are good at investment management, but we are perhaps not the best people at running a business, and we havent focused enough on distribution, he says. It would have taken us ten years to develop our distri-bution capabilities properly, and that would have taken up a great deal of capital.

The two sides took several months to negotiate terms before reaching agreement in May 2010. In addition to the payments and three-year lockup for GLGs principals, Man paid $4.50 a share to public share-holders, who owned about a third of GLG. Although it was the clear target in the deal, GLG came into the merger on a strong footing. Most of its funds were recovering quickly from the crisis fully 80 percent of the firms hedge fund assets were at their high-water mark by September 2010 and GLG would attract $2billion of net inflows in the first nine months of last year.

The purchase established Clarkes credentials as a fitting successor to Fink, who had used acquisitions to build Mans hedge fund business. Deal making comes naturally to Clarke. The CEO began his career at law firm Slaughter and May and

then worked as an M&A banker at Morgan, Grenfell & Co. and Citicorp. In 1993 he received an approach from Andrew Sutton, a former Citi colleague then working in Mans corporate finance department, and decided he wanted to try his hand at being a principal rather than simply an adviser. He helped thenfinance director Fink weigh strategic options for the group and recom-mended an IPO rather than a strategic sale; Man went public in 1994. He also took part in the decisions to expand into funds

of funds in the late 90s and to divest the commodities brokerage business in 2007. For Clarke, the GLG purchase fits neatly into Mans long-term strategy by filling out its portfolio of hedge fund offerings with single-manager strategies. Each step has been logical and incremental, he says.

Now all Clarke needs to do is prove that his alternatives supermarket can grow, and do so profitably. The merger, completed in October, didnt get off to the most auspicious start, given the negligible inflows in the fourth quarter of 2010, but it is still very early days.

Retaining Clarkes new stable of star managers at GLG will obviously be crucial for the long-term success of the merger. Although the two firms have come together, both Clarke and Lagrange are emphatic that the deal has never been about merging investment management.

We would be mad to try to create a com-mon culture in investment management, says Clarke. We want GLG to carry on performing well, so we dont want to change anything there. It would certainly be diffi-cult to integrate the discretionary managers at GLG with the 130 or so quantitative staff employed by AHL. Lagrange seems confi-dent that the two firms can maintain their separate identities and strengths. Man doesnt want to change our culture its the culture they wanted to buy, he says. It would have taken them a long time to develop it organically.

GLGs managers say they relish the lati-tude they have to run their portfolios under the terms of the deal. Its not the sort of merger where investment managers are fearing for their jobs, says Karim Abdel-Motaal, co-manager of GLGs $2.5billion emerging-markets fund. Whats happen-ing is simply that Man is adding business process and discipline to a very entrepre-neurial organization.

Although it would certainly help to retain GLGs principals for more than three years, it might not be necessary. But Clarke considers it vital to keep as many of the firms 20 senior portfolio managers as possible, and he notes that so far all of them have stayed on board.

Beyond keeping his new partners happy, Clarke must find ways to come up with suc-cessful new products to generate growth. The new Man Systematic Strategies group, led by Rattray and Stefan Scholz, who serves as the units COO and head of research,

Man doesnt want to change our culture its the culture they wanted to buy. It would have taken them a long time to develop it organically. Pierre Lagrange, gLg partners

m a r c h 2 0 1 1 i n s t i t u t i o n a l i n v e s to r

5 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

hedge funds

launched two products in January. The Man GLG Europe Plus Source ETF is a long-only fund that will use algorithms in a bid to profit from the recommendations of about 60 brokerages. The idea is similar to Marshall Waces Trade Optimized Portfolio System strategy, except that Mans ETF is a purely passive product designed simply to beat European equity index returns while taking on low levels of risk. The ETF will not trade on brokerages sell recommenda-tions, as TOPS does. Executives believe the strategy can gather several hundredmillion dollars in assets. The strategies group has also launched an institutional product called TailProtect, which, as the name implies, is designed to safeguard investors capital during times of market stress. TailProtect is based on an actively managed vehicle devised by Man Multi-Manager for internal use, and already runs $175million.

In February, Man introduced a new strategy called Man IP 220 GLG Ltd1, the first product to combine exposure to AHLs flagship diversified strategy with exposure to Gottesmans global opportunities strategy. The offering comes with a 100 percent capi-tal guarantee at maturity in 12 years and six months, which Socit Gnrale will provide using capital-protected bonds. Man aims to achieve double-digit returns and generate several hundred million dollars of sales by using independent financial advisers and private banks to reach private clients in the Asia-Pacific region.

The mergers success will also depend on the ability of Mans vaunted marketing and distribution team to generate extra sales. Moeller, the Switzerland-based head of sales, has already begun reorganizing his 300-strong team in a bid to reach more insti-tutions than AHL traditionally has. He is concentrating his 80-person London sales force at GLGs Curzon Street offices in an attempt to take advantage of the firms greater institutional penetration and range of products, including its long-only funds. We will also be hiring a few people in the U.S., and well be moving some staff out to the Middle East and to Asia, he says. Currently,

the combined group derives only 10 percent of its funds from U.S.-based investors.

Moeller wont disclose his sales targets, but Philip Middleton, an analyst at Bank of America Merrill Lynch, estimates that an additional $3billion a year in sales of GLG funds and new products would justify the acquisition for Man.

Even as he bids for growth, Clarke cant afford to neglect existing products, begin-ning with AHLs. The managed-futures unit is Mans flagship, and its Man AHL Diversified fund has produced annualized returns of 16.7 percent from its inception in March 1996 through September 2010. But AHLs decline in 2009 and its vulnerability to the Fed-induced drop in market volatility remain worries. As CEO Wong puts it, The trend followers nightmare is stable prices. Most of the funds losses in 2009 came on bonds and currencies, markets where quan-

titative easing and market intervention by governments around the world helped to stabilize prices in narrow ranges.

AHL has since developed a number of computerized trading models designed to respond better in the current macro environ-ment, Wong says. The fund did post a healthy rebound of nearly 15 percent last year. Wong also insists that AHL is perfectly capable of growing strongly even at its year-end 2010 size of $22.6billion a matter of no small importance given Clarkes $200billion group goal because of the sheer scale of the 150 or so global futures markets in which it invests. Were designed to operate as an aggregate of small players, so we can be as efficient as smaller players, he says.

Clarke also needs to find a way to revive Mans hard-hit fund-of-funds business,

whose total assets had dwindled to $14.7bil-lion at the end of 2010 from $55billion in June 2008. Fallout from the Madoff scandal has hurt the fund-of-funds business gener-ally. The combined assets of funds of funds managing $1billion or more shrank by 46 percent between June 2008 and June 2010, to $595billion, according to a recent survey by InvestHedge. Performance also tends to be lackluster. Mans best-performing fund-of-funds product delivered average annual returns of 5.9 percent in the five years through December.

In 2009, Man merged its three fund-of-funds operations into a single unit, Man Multi-Manager, in response to investor demands for greater transparency and better corporate governance following the Madoff affair. Luke Ellis, who took charge of the 80-person Multi-Manager unit last year, says the whole fund-of-funds indus-

try needs shaking up: There was a time when the industry could survive on simply providing access to hedge funds because investors couldnt find them. That is now a dead business model, and its been further damaged by Madoff, which was a horrid mess for everyone.

Ellis believes managed accounts, in which clients retain more control of their funds, address the growing demand for more trans-parency and safeguard against fraud and illi-quidity. Already, Man Multi-Manager runs about two thirds of its assets in this form. To me, the managed account is the backbone of the future of the business, says Ellis.

With such big strategic matters on his plate, Clarke may look back fondly on the time when the question before him was whether to allow jeans.

There was a time when the industry could survive on simply providing access to hedge funds. That is now a dead business model. Luke Ellis, Man group

5 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

Posted from the March 2011 issue of Institutional Investor Magazine. Copyright 2011 by Institutional Investor Magazine. All rights reserved.For more information call (212) 224-3205