Can the world’s largest listed hedge fund rebound?

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0:33There was a time when Mann Group was at the cutting edge of investment strategies. A pioneer in the city of London. So look, back in the 90s, Mann Group were essentially these cool nerds that were using mathematical models, lots of data, to make bets that were decided by these models in computers, not by individuals. That's CFT's hedge fund correspondent, Costas Morsellas. A lot of people were still thinking about trading in more old-fashioned terms, like a street-smart trader calling up their broker to buy a stock or shouting buy and sell orders on the floor of a physical exchange. Mann was doing things differently.

1:10What Costas is referring to is quant trading, an investment strategy that uses mathematical and statistical models executed by computers to make trading decisions. And that was very untested territory, and it fast became the hottest area of finance. But some 30 years on, Man Group is in a very different place. I think the big tension is this desire to become a broader asset manager, you know, expanding into areas such as long only, private credit, real estate, but also trying to be a hedge fund at the cutting edge of finance, you know, developing the most sophisticated trading strategies and making huge profits in the market.

1:52The hedge fund unit where Man Group built its reputation in quant trading has been facing a few years of difficulty. Key strategies have been in the red and wealthy individuals have pulled their money out. Things have improved a bit for Man's quant unit recently, as some strategies have performed much more strongly over the past two months. But if they don't turn the bus around, they could certainly see more people pull their money out. They've already seen withdrawals earlier this year from wealthy clients in some of their key hedge fund strategies. so that could get worse.

2:26I'm Michaela Tendera from the Financial Times. Man Group's hedge fund unit is now battling three years of lackluster performance. Today on Behind the Money, it's the world's largest listed hedge fund manager. But where does Man Group go from here?

2:59Welcome to the show, Kostas. Thank you so much for having me. So Mann Group, funny enough, they made a name for themselves in the hedge fund world in the late 1980s and 90s. But the origins of the firm go way further back. So tell me about that. So it's a really interesting company. Mann was founded in 1783 as a sugar brokerage and corporate company. by James Mann in the city of London. The following year, it secured an exclusive contract to supply rum to the Royal Navy for, I believe, the next 200 years. It sort of developed into other commodities, such as coffee, cocoa, and was sort of big in all the different London auction houses.

3:39And so it has quite an interesting history. I think things started to change for them when they acquired a quantitative hedge fund known as AHL in the late 80s. So AHL is the business that launches Man Group's big entrance into the quant world. But what makes that so special? So the first thing to say is there's a huge quantitative hedge fund universe and includes a variety of strategies. Man Group is known as a trend follower. And the way it works is you ingest a ton of market data and you try to follow market trends. So, for instance, this year, gold has been going up and up and up and up. So they ingest that data.

4:25They say, look, gold has been going up for 30 days in a row, 40 days in a row. We should make a bet that gold will keep going up. So basically, it's using mathematics and computer models and latching onto these market trends to make money. Kostas tells me that Mann's trend-following strategy gives it a special edge, even during economic downturns. If you think about what happens during stock market crashes, like for instance in 2008, everyone typically loses money, right? Because stocks are going down all across the market. But what trend-following can do for you is if stocks are going down, they start to bet that stocks will keep going down.

5:09And so trend followers can actually do very well in all market environments, provided, of course, that the models are working well and the data is good and they're positioning correctly. So that's what makes trend following special. It's this ability to make money in any market environment or at least almost any market environment.

5:31Kostas, how would you say owning this quant division AHL changes man group? I think it completely transforms the future of the group for good and also a little bit for bad, because AHL is quite a volatile business model where they can make huge profits one year from the performance fees that they charge to investors. Performance fees are the percentage of profits that they make for investors, which they keep for themselves. And this means that they really need to perform well each and every year to generate these huge returns for investors and profits for themselves. But inevitably, there's going to be weaker years.

6:06And when there are weaker years, that can affect the share price. So it can make the share price quite volatile, which makes it both a blessing, but in a weird way, also a curse. This blessing and curse phenomenon Costas is talking about is in part because, as we mentioned earlier, Man Group is a publicly traded hedge fund. They listed back in 1994. Because of this, they often find themselves in a bind. They need to satisfy both their fund's investors and their shareholders. There is this tension at the heart of Man Group as a publicly listed hedge fund. On the one hand, they're trying to deliver the best possible returns for the investors in their hedge funds.

6:46But at the same time, they're trying to please their shareholders. And these interests, at least in the short term, might not be completely aligned because shareholders appreciate big dividends, big buybacks. They want to see the share price go up. But the investors in the hedge funds, they want to see the best possible performance. So these things don't always align. So to try and address their hedge funds' volatile returns and therefore appease shareholders, Man Group decides about a decade ago that it needs to diversify its business beyond its quant strategies. The move away from the hedge fund business and towards more diversification began in earnest in 2014, when they acquired Boston-based long-only specialist Numeric.

7:33They had tried big-ticket M &A before, with the acquisition of star stock picker GLG in 2010, but that didn't really come off. So after the 2014 deal for Numeric, they followed in 2017 with the acquisition of a real estate specialist, and that kicked off their private assets business, again, away from the hedge fund business. And they added to their expertise in private assets in 2023 when they acquired private credit manager Varagon And again, this year, they acquired another private credit manager called Barden Hill. So fast forwarding to the present day now, how has this string of acquisitions worked out for Man Group's business and their success?

8:13It's definitely changed the business. Man Group was known for being a top tier quantitative hedge fund manager. And there's definitely been a bit of a rebranding, a changing in focus as they've added all these different businesses. and they've become more of what you might call an alternative asset manager. You could see it as sort of evolving with their clients because before 2008, a lot of the investors in the hedge fund space were very rich individuals, families. They liked high octane strategies. But now investors in the hedge fund space tend to be, you know, big institutions like insurers and pension funds, which prefer sort of steadier partners and more reliable sort of hedge funds to work with.

8:54So the whole idea is Man Group, they're evolving into this solutions provider for these big investors. So for instance, they now have real estate capabilities. They can help you invest in a real estate fund. They can help you invest in a private credit fund if that's something you're interested in. They obviously still have the quantitative hedge fund unit, which is a big appeal. They also have their long-only business. So it's this idea as being this one-stop shop for big institutions that are looking for a partner across all their businesses, rather than just being a hedge fund manager. In essence, Man Group makes this pivot from quant fund to alternative asset manager.

9:32I think it's a slightly awkward place for them because they're still much smaller than a lot of their competitors, say, you know, a Blackstone in the U.S. managing over a trillion or a BlackRock managing multiple trillions. Man Group manages about 214 billion U.S. dollars in assets. So So they're far smaller. So it's a slightly awkward place for them. They have this rich heritage of being a hedge fund, but they're sort of trying to not be a hedge fund. They're trying to be something more akin to some of these rivals. Beyond trying to be a one-stop shop, straddling the worlds of quantitative hedge funds and broader private asset managing, there's another problem.

10:16Something that used to be man's key attraction. So trend-following strategies have really struggled recently, especially this year, because with the election of Donald Trump and the advent of the trade war that began earlier this year, markets weren't really sure whether they were going up or they were going down. And that's bad for trend followers because trend followers like these clear trends. Stocks are going up, up, up, up, up or down, down, down, down, down. They don't like it when stocks are up one day because the president tweets something positive and then they're down the next because he launches a trade war against another country.

10:47But then they're also up again because he walks back from the brink. So that's been really difficult for the sector. And it's been difficult for Man Group. So it seems like Man Group's sort of at a fork in the road. What has your reporting shown about where they go next? How do they navigate this? So I think they have two choices. And I do think they are at a fork in the road because they have limited resources. They can continue on the one hand with the current strategy, which is diversifying the whole business. keep on buying other businesses, for instance, in private credit, the long-only business, and returning the current rate of capital to shareholders and hope that the hedge fund performance improves within that unit.

11:30On the other hand, they could really invest in the hedge fund unit and go all in, improve performance even more of the current strategies that they have, keep diversifying, investing in new, exciting, quantitative strategies that other hedge funds have had success with and really make the hedge fund unit the envy of the street. So that's the other option. But I think it will be really difficult to do both. From a rum supplier to a quant fund to an alternative asset manager. What might Man Group's next era look like?

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12:45You know, the solutions provider, asset manager, or the quant hedge fund. Now, you've done a lot of reporting speaking with former Man Group employees. So let's talk about what Man Group would need to do if they went further into the hedge fund route. Yeah, so I think if you think of the broader hedge fund landscape, you have firms at the very top, such as Citadel Millennium, which charge much higher fees for their investors than the rest of the hedge fund landscape, including Man Group. And this has enabled them to invest an enormous amount in talent, data and technology. And it's kicked off an arms race across the industry.

13:21So it affects the broader hedge fund industry, which also have upped their game in terms of paying more for portfolio managers, investing more in technology. So it affects everyone. And the concern I hear from some ex-employees of Man Group is that they don't quite have the resources to take on some of the big U.S. hedge fund giants like Renaissance Technologies, Two Sigma, D.E. Shaw. And they think that they should be more focused on that. So they don't have the resources to compete in the so-called war for talent and things like that. But do they have any other options? Yeah, so the other point that people make is that it's great to be diversified.

14:00It's something that all asset managers generally aspire to do. What they could do more of is diversify within the strategies of the hedge fund unit, rather than adding on all these other non-related strategies like private credit. So, for instance, Man Group has been known as a trend follower, as I said. But why hasn't it done more within the hedge fund unit to explore other quantitative styles? They are starting to invest in statistical arbitrage. They've done this over the past two to three years. But this is a strategy that's been around for many, many years. So progress has been slow. Another example is their multi-strategy hedge fund called 1783, which is trying to compete with industry giants like Citadel and Millennium.

14:43And just to give you context, an entirely new multi-manager hedge fund, Bobby Jane, he managed to raise over$5 billion from the get-go. Man's strategy is 1783. They are far smaller. So there's been this sluggishness in creating alternative hedge fund strategies that will make huge returns within the hedge fund unit and away from trend following. Right. But couldn't another argument be that maybe as Man Group is smaller, they could offer more of like a niche bespoke experience for their clients? That could be a benefit. And when we reached out to people earlier, one hedge fund allocator in particular made a point of saying that they enjoyed working with Man Group.

15:30They thought they were very smart and considerate partners. So of those different pathways we talked about, you know, focusing on the asset management business versus leaning into their hedge fund strengths. Which do you think man group are most focused on right now? So I think management would argue that they're focused on both and that they can focus on both investing in the hedge fund division, but also continuing to diversify the business. And they did get a boost last week with their Q3 results. They had about 11 billion of net inflows into their traditional asset management long-only business.

16:08And, you know, a few more quarters of that. And then slowly, slowly, they start to build more revenues which are independent of the hedge fund unit, which has been a long-term goal for them. We should note, however, that the long-only business, the fees charged are significantly lower than the hedge fund business. And in last week's results, we saw outflows continue from the hedge fund unit,$1.3 billion to be precise. So, Kostas, man groups undergone what seems like an overhaul to its image in the last decade or so. I know people always talk about image and brand for more consumer-facing products.

16:50But how much of a role do you think branding plays among hedge funds and asset managers? And in turn, you know, how is that impacting man group? Look, I think it's extremely important. Performance is only one factor when it comes to how institutions make their decisions on who to invest in. It's about looking investable, looking institutional, looking professional, like a reliable partner. So the brand is extremely important and it does preoccupy them. They killed a few brands last year that were associated with a group like GLG, which we mentioned earlier. but they're really coalescing around this MAN brand now as a solutions provider, even as they have kept some of their other key brands like AHL, of course.

17:32I think you're right to focus on the question of the brand. And I don't think the brand evolving to be this broader solutions provider will be a problem for them. As long as the hedge fund unit, AHL, and the broader strategies within MAN do perform well, And they do manage to pull out of this sort of difficult period for the hedge fund unit, because I don't think it's a problem for investors that are investing in private credit or long only to know that there's a cutting edge hedge fund unit that's behind the brand. But if the hedge fund unit does continue to falter, then that could also be negative for the brand.

18:09Do you think then that Man Group can get back to this heyday that they were in, you know, some decades ago? I think they actually can, despite the challenges of being a listed company and the pressure that that puts on them. One example that their multi-strategy hedge fund I mentioned earlier, MAN Strategies 1783, it's been doing very well this year and the previous year that they did very well. So clearly, they do have the ability to come up with innovative new hedge fund strategies that will perform well, make them big fees and are not just about trend following. We should also say that a number of my group's key trend following strategies have recovered some of the losses that they sustained earlier in the year.

18:53In particular, their flagship trend following fund is now up a couple of percent. But what a number of ex-employees say is that to really develop the hedge fund unit, make it really competitive, diversified and ready to take on some of the industry giants, they may have to cut expansion in areas that are non-core to the hedge fund unit and the business overhaul, like potentially private credit or even cutting dividends and buybacks so they can really invest in technology and the next generation of strategies. Kostas, thanks for coming on the show. Thank you so much for having me.

19:54is by Hannes Brown. Topher Forges is the FT's acting co-head of audio. Thanks for listening. See you next week.

20:24while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.