The original thinking behind Chicago's pioneers

Originally published in the April 2008 issue

The story of Glenwood is really the story of how a pioneer in Chicago's nascent fund of hedge funds sector turned his start-up into an institutional-grade fund of funds, a firm that is now an integral part of one of the largest hedge fund groups on the planet. Frank Meyer, the pioneer in question, is certainly highly spoken of around the alternative investment community in Chicago.

A former co-manager at Grosvenor Partners, it was Meyer who founded Glenwood in 1987, and turned it into a seasoned and respected fund of hedge funds enterprise. But it was the involvement of Man in the equation, matching Glenwood's fund selection expertise with world-class distribution capabilities and canny product structuring that really took Glenwood to new heights.

Meyer's original plan when he founded the firm in the 1980s was to use Glenwood to integrate hedge fund investing with venture capital and private equity investments, but when he was introduced to Man Group by hedge fund manager Larry Hite in the early 1990s, a new and very profitable partnership was born. In 1993 Man had decided it should expand its capabilities in the hedge fund arena. It liked the look of Glenwood because of the firm's long track record, and its status as a pioneer in the fund of hedge funds business. In addition, Meyer's client base of wealthy individuals wanted the same thing as Man's – to achieve returns typical of stocks, but with risk levels more usually associated with bonds. "It was a very appealing prospect for us," says Christoph Moeller, global head of sales and marketing with Man Investments. "It was a business founded on high net worth private clients, with a similar philosophy, and a good network in the hedge fund industry."

Initially, Glenwood acted as the investment advisor for Man Glenwood, a Swiss entity, as part of a joint venture agreement, but in 1996 John Kelly, a man described by Glenwood CEO John Rowsell as "one of the key architects of Man's distribution systems globally," hit on the idea of combining the investment management expertise of Glenwood and managed futures specialist AHL into a single principal guaranteed product, the famous IP220 series.

"This continues to be one of the most successful products that Man has," says Rowsell. It combines the performance and volatility of the AHL portfolio with the more stable return and diversification benefits of Glenwood's strategy, and teams that with a capital protected guarantee. By 2000, the year when Man acquired Glenwood outright, the IP220 notes were a very substantial slice of Man's business, and they have continued to be ever since.



By the end of 2000, Glenwood was managing a respectable $1.8 billion, most of which had been raised via Man's distribution network. With Meyer already approaching 60 and thinking about reducing his workload at Glenwood, Man knew it needed to hunt for some new faces to help it to take the fund of fund's successful formula into the next decade. "Man has played an interesting role in the succession planning," says Rowsell. "They needed Glenwood to recruit some senior investment personnel whom they could transition the business to when the principals decided they were going to leave."

The aim was to create more depth in the firm's management structure by bringing in new personnel who could be partly incentivised with Man shares in order to keep them with the company over the long term. The sales, marketing, and distribution could be carried out at group level, leaving Glenwood to focus on managing money.

Chicago, Glenwood's home town, has plenty of depth when it comes to asset management, with a number of the bigger alternative investment shops in the US located in the shadow of Sears Tower, amongst them Citadel, Mesirow, and Harris Alternatives. Consequently, when Man went looking for new blood to inject into Glenwood, it knew it had a large number of experienced professionals within a stone's throw of the Glenwood offices on Chicago's North Wacker Drive. Rowsell, now Glenwood's CEO, was managing an internal hedge fund at McKinsey before he went over to Glenwood, and CIO Mike Jawor was working at fund of funds Sirius Partners. When Meyer announced he would be retiring in 2003, Rowsell already had two years in Glenwood, and was able to move into the CEO's job seamlessly.

The Chicago way

Visiting firms in Chicago, one quickly gets the impression that the hedge fund community here is smaller and more relaxed than in other financial centres. Many professionals know each other, and may have worked with each other previously. The Chicago hedge fund manager will tend to remain in the Windy City, rather than be tempted away by the bright lights of New York, or if he is lured away to the east coast, frequently returns to work on the shores of Lake Michigan later in his career. Glenwood and its peers all have long track records stretching back over 15 to 20 years, and the founders and principals of the leading funds of funds are widely recognised both within the local Chicago alternative investment community and on the national stage. John Rowsell first met Frank Meyer, for example, when Rowsell was working at the Chicago Mercantile Exchange in 1991.

Visiting firms in Chicago, one quickly gets the impression that the hedge fund community here is smaller and more relaxed than in other financial centres. Many professionals know each other, and may have worked with each other previously. The Chicago hedge fund manager will tend to remain in the Windy City, rather than be tempted away by the bright lights of New York, or if he is lured away to the east coast, frequently returns to work on the shores of Lake Michigan later in his career. Glenwood and its peers all have long track records stretching back over 15 to 20 years, and the founders and principals of the leading funds of funds are widely recognised both within the local Chicago alternative investment community and on the national stage. John Rowsell first met Frank Meyer, for example, when Rowsell was working at the Chicago Mercantile Exchange in 1991.

Chicago, Rowsell says, is the ideal place to site a fund of funds. Labour pool aside, its transport links are second to none, allowing its analysts to visit New York and Greenwich for the day if necessary. It is also within striking distance of the west coast, and has direct flights to Europe out of O'Hare. Indeed, at one stage in his career, Rowsell used to commute to New York on a weekly basis from his home in Chicago. "I've done day trips to Los Angeles," he says. "Even if you leave at eight am Chicago time, you can be in LA at ten am Pacific."

Investment philosophy

Like other successful hedge fund investors of long standing, Glenwood follows some basic principles to ensure it succeeds as a portfolio manager. Know your managers. Don't invest in anything you don't understand. It seems simple, but it is still surprising how many hedge fund investors fail to do either.

"It is still quite true that this business is about personal relationships," says Rowsell. "[Hedge fund investing] is still a high touch business, although the extent of this depends on whether you're seeking exposure to strategies as an asset class, or whether you're trying to home in and capture generators of alpha." Glenwood, says Rowsell, is an investment business, not an asset allocation business.


Glenwood doesn't use standard strategy categories when approaching hedge fund allocations: instead it uses six different style buckets when managing its portfolio, including commodities & macro, event driven, distressed & credit, hedged equity, variable equity and relative value. The investment committee convenes an annual meeting to review the firm's allocation to its style buckets and how the current and expected economic and investment environment will affect them. On a quarterly basis the firm tactically reallocates to each bucket according to its updated strategic view. Each is driven by economic and investment environments.

The stress is not on losing sleep over whether you're overweight on managed futures, and more about finding the right managers, as investors, businesses, and individuals. "You need experienced people to make that judgement," says Rowsell. "You have to make a judgement based on the individuals managing the fund, and it is useful to have that strong personal relationship to back that up. We look for people with the right background and integrity [to invest with]. The hedge fund arena offers people high returns, and whenever you have an industry like that, it manages to attract less scrupulous people. We have managed to avoid all the frauds out there."

With distressed, Glenwood doesn't try to time the cycle, but will invest with managers during periods where there is a high rate of defaults, and there will be plenty of opportunities for them. With hedged equity, it is more a question of the dispersion in the markets – are stocks moving up and down in close correlation, or are there clear winners or losers?

Relative value, on the other hand, tends to be looked upon favourably when there is dispersion with non-equity factors. Variable equity is much more driven by directional factors. Capital is moved around slowly in the Glenwood funds, apart from in exceptional circumstances. The firm gleans information on the markets from talking to the managers it holds, and is able to update its strategy allocations periodically to focus on those areas where medium term opportunity is judged to be more favourable to expected risk.

Mike Jawor, the Glenwood CIO, says he doesn't have much of a problem categorising managers between styles – indeed, the only area where it can sometimes be difficult is between hedged equity and variable equity funds where a manager's net exposures can evolve over time. "A bigger issue that we focus on is our aggregate exposure to the most correlated of these style buckets, which is hedged equity, variable equity, and event-driven."

So what is Jawor looking for when adding hedge funds to his buy list? "Original, independent thinking and research; a fundamentally sound investment strategy; and strong business and team management abilities," he says.

Glenwood is set up so that its senior figures have a very hands-on role in sourcing, approving and monitoring managers. This ensures the firm's principles are consistently applied. This kind of approach will sit well with investors, some of whom have been expressing concerns about the way important decisions are being delegated at some funds of funds.

"Exceptional managers," is the term Jawor uses for the sort of fund he would like to see in the Glenwood portfolios. Like other funds of funds with scale, there is a lot of time and energy spent on sourcing these exceptional managers. Glenwood maintains a specialist sourcing team which has four full-time personnel plus an assistant tasked with finding new managers.

The manager sourcing team is dedicated to making the first contact with managers, and will generally have some form of interaction with over 1,500 managers in any given year. It will conduct over 500 face to face meetings with managers, all of which will be documented, with the team's conclusions, on Glenwood's database. It also coordinates with Jawor on a weekly basis to decide which new managers should be recommended to the investment committee for further due diligence, which is initiated on around 100 managers per year. Sourcing of managers on this short list has historically been driven by Glenwood's network of personal and professional contacts, including other hedge fund investors, leads from Man, and active tracking of personnel within the hedge fund industry. "It is important that the people within the sourcing team are generalists," Jawor says. "There are some funds of funds that are structured to carry out this activity on a strategy basis, and the person who covers a group of managers is also the person who looks for new managers in that strategy. But we are structured so that the monitoring people and the sourcing people are completely separate functions. The monitoring people are specialists, and the sourcing people are generalists."

There is a lot of focus on a manager's apprenticeship: while having a CFA behind your name is a plus, Glenwood is interested in which firms a manager has worked, and who he has worked alongside. Who were his mentors? What sort of market environments was he exposed to? Movement from one firm to another generally signals something about the manager. And it's not just the hedge fund manager, but also the rest of his team that Glenwood pays attention to: who are his in-house analysts? Where did they work before? Why did they move?

Glenwood also has an intermediary step when approving new managers called the new investments group, tasked with coordinating the approval work and making sure all the required steps are completed to Glenwood's standards before the firm commits capital to a new manager. This has the effect of keeping sourcing completely focused on finding new managers – once a manager has been identified for potential approval the new investments group takes over. The new investments team is also structured as generalists. This also contributes to the stripping away of any internal style advocacy bias that besets some large fund of funds shops.

Reputation counts for a lot too. Glenwood doesnot seed managers, but it will give them 'day one' money. Man has other seeding operations under its umbrella, like RMF and Man Global Strategies. Being a 'day one' investor and investing with a new investment firm, often without a track record, almost requires as much work as seeding a manager. However, Jawor believes that truly great managers, especially those just starting their own firm, do want to be challenged by their first investors. When things get tough, the investors who have done the most work, and are comfortable with both pros and cons of a given manager, are not the ones who flee at the first opportunity. Great hedge fund managers understand this and are willing to spend a lot of time upfront going through Glenwood's approval process. As an investor, Glenwood will be more likely to stick by those managers who it has chosen to support at an early stage and has undergone extensive due diligence on, than some of its peers migh

"Even after approval, we have senior people who continue to challenge [our managers] and keep a very open dialogue with them," says Jawor. "If a manager gets into trouble, we don't necessarily want to run for the door. We want to go and explore what went wrong. We've got senior people who can take a full look at that manager and make an informed assessment as to the true underlying cause of the trouble, and the credibility of any proposal changes to investment processes." This all contributes to Glenwood's cachet in the marketplace, and helps it to get access to those managers it terms exceptional. Although new hedge funds are being launched all the time, Jawor and his team know that those whose funds they want to buy into can still be selective when it comes to taking investment capital. It requires more than just a willingness to invest if you're going to have access to the top talent.

Glenwood maintains a mix of large and medium sized managers, with very few under $500 million in AuM. Because it wants to keep between a 1 to 5% position in a given manager and generally doesn't want to be more than 10% of a manager's AuM, the firm tends to avoid smaller hedge funds. "It doesn't make sense for us from a portfolio perspective," says Jawor.

Despite its emphasis on managers who have had experience of trading through multiple market cycles, Jawor says Glenwood does not have problems finding enough managers in which to invest. Yes, there have been a lot of new fund launches since 2001 for example, but this natural expansion is the result of producing second and third generation portfolio managers coming out of the big hedge fund firms like Soros and Tiger.

Also, both commercial and investment banks have been building up prop trading groups as well, formally separating them from their market making activities. "Generally when someone comes off a trading desk where market making is involved, it's hard to know whether the chair is making money, or the individual is making money," says Jawor. But the traders coming off of the prop desks have now built up five or more years of segregated records which are now readily discernible to external analysis. They are also providing a ready source of new talent coming onto the hedge fund market.

The great managers are also re-opening for new investment, and adding new strategies and teams all the time. New analysts are being hired, allowing firms to expand their capital bases. The growing multi-strategy nature of the big groups means they may accept additional capital from new investors as a new strategy is readied. Like other seasoned hedge fund investors, Glenwood stays in close touch with these managers until they reopen, at which point Glenwood is frequently one of the first to be allocated additional capacity.

"You have to have the capability to really analyse whether a manager is capable of adding a new strategy or is simply exhibiting style drift," says Jawor. "A lot of times amanager will add a strategy that is not completely different, simply the next strategy over. You could have an event manager who hires a distressed team – those strategies are closely related in terms of the basic skills that you need to be successful. You might not be comfortable, however, with a quantitative manager hiring a fundamental stock picker."

Original thinking

The danger in the market today, in Jawor's view, is having too much money in crowded trades: various hedge fund idea-sharing dinners, name sharing and so forth can lead to overlap, particularly in event, long/short equity, and some macro strategies.

To minimise that, Glenwood looks for evidence of contrarian thinking and positioning on crowded trades from its equity managers. Someone on the short side of a crowded long trade who can demonstrate why they're positioned that way could be worth a look. In the US, reviewing the 13F filings can help a fund of funds to see where crowded long trades are occurring in the hedge fund space. Talking to managers about short rebates can also help to gauge whether a fund is participating in too many consensus trades on the short side.

Unique sources of insight on a company and its management can also be evidence of original thinking: for example, analysing the backgrounds and professional track records of the senior management of a company in addition to the usual homework on customers, suppliers, distributors and competitors, can be evidence that a hedge fund manager is thinking beyond traditional financial analysis. "They're able to mould it together to produce an original insight on that company," says Jawor.

Independent thinkers can be in crowded trades too, but they'll structure their risk return differently. For example, they might use options, or if a long requires a short, could put together an innovative and creative basket of competitors for their short, rather than an index hedge. These managers tend to be more cognisant of the range of outcomes possible – they know they're in a crowded trade, but they're planning for all kinds of possibilities.

Given the proliferation of new and uncorrelated strategies appearing on the market, where hedge funds are appearing that are trading new asset classes (this writer recently heard of one trading Internet domain names, for example), one would expect Jawor to be an enthusiast of emerging strategies, but ultimately he seems more keen on managers taking an original approach to existing asset classes, than offering exposure to complete new markets he and his team are unfamiliar with.

The Glenwood CIO says he has some "highly differentiated managers" in the commodity/macro bucket of his fund, including some which are very contrarian by design, people not focused simply on where the US Dollar/Yen is going over the next two weeks, but longer term economic themes.

Says Jawor: "They're sceptics about where the money is being made now, they're looking to reverse the crowded trades they're seeing in the market. We have one manager right now who has a thesis on resurgence of manufacturing in the American heartland, and who believes that the industry has gone too far in globalisation terms. There are certain things that don't fit that globalisation theme, like transport bottlenecks. Taking advantage of the things that don't fit that globalisation theme puts you in an uncrowded space compared with what other people are doing." Managers who can consistently find overvalued or undervalued securities, those who can be the catalyst to unlock value where others can't, firms with the talent and capital to lead the restructuring of a company and take it out of bankruptcy, these are the kinds of managers that Glenwood seeks.

Putting it into practice

Despite the emphasis on strategy buckets at Glenwood, Patrick Kenary, the firm's Head of Portfolio Strategy, is keen to emphasise that Glenwood does not approach its portfolio from the top down.

"We talk to a lot of managers, including some of the most sophisticated investors in the world," he says. "We get to hear about the issues of the day, what people are talking about, what they're not talking about, and the context for the decisions they're making." Markets and strategies go through cycles, and it is important that the Glenwood investment committee stays closely tuned to the opportunity set faced by the managers it tracks, and dictates the context in which it views those managers. After all, it doesn't want to increase its exposure by investing in a manager that will lead to a higher weighting in a strategy bucket it is negative on.

"It's not really top-down positioning, it's more common sense," Kenary says.

Apart from the annual meeting of the investment committee, discussed above, Glenwood also holds a quarterly meeting to update its strategic focus and re-evaluate where it is positioned within the strategy ranges established during the annual meeting. Glenwood's manager-focused approach means it does not abruptly move money in and out managers. Allocation changes, therefore, are incremental, focused on long term market adjustments.

As a result, even in times of excessive market turbulence, like last year, Kenary feels there is not really a need to increase the frequency of the style allocation meetings of the investment committee. "The real discussion is more of a specific assessment of where the opportunities and risks lie for our managers," he says.

Glenwood's investments team is tasked with ongoing due diligence on all managers in the portfolio. In doing so, it has to re-test the thesis behind each investment. It is organised by investment strategy, with analysts serving as strategy specialists. This lets the investments committee have a picture of the evolving opportunity set in each strategy, coupled with in-depth relative manager analysis.

The strategy categories Glenwood employs in-house are quite broad, and allow for plenty of flexibility – it does not want to get too tied up with worrying about definitions. Its fixed income category can hold managers who are short sub-prime alongside those specialising in distressed situations. The importance is to identify themes, for instance last year's rising volatility and dispersion, which are likely to affect the portfolio at a number of levels.

Glenwood uses managed accounts occasionally, but tries to avoid them if possible. "We tend only to use them if we want a manager to do something different with his strategy," says CEO Rowsell. "If we own a lot of a manager, we sometimes prefer to have a separately managed account."

The senior figures at Glenwood all cite original, independent thinking as the watchwords of their business. As a firm, it spends a lot of time studying its managers, seeking to get an idea of how they are participating in the market. If they are in a crowded trade, what are they doing there? Kenary and Jawor are alive to approaches that might look new and different, but are, in Kenary's words, "just another way of putting on the same [crowded] trade."

"There are often multiple implicit bets in any trade," explains Kenary. As a fund of funds, it is important to make sure that several underlying managers are not betting on the same outcome. Glenwood is helped in this respect by the increased transparency of the US equities market, something which EU governments are starting to lobby for on the other side of the Atlantic, and which could well make the fund of funds' job of tracking European equity managers easier too. The 13F filing allows Glenwood to keep close track of the way its US equity funds position themselves, and the originality of thinking being displayed by the investment brains it is backing.


Glenwood sits neatly within the Man hedge funds suite, as a manager of more mature hedge funds. Backing start-ups is left to RMF and Man Global Strategies. Man's Christoph Moeller cites the relative experience of the personnel now at Glenwood's helm as one of the key selling factors for those institutional clients now considering investing in hedge funds, and coming to Man for that exposure. "They like to meet with a number of different funds of funds [before deciding where to invest]," says Moeller. "They like to meet most of the people from the investment committee. They are always impressed by the amount of experience the guys at Glenwood have. This is not always the case when you are looking at the fund of funds world, but with Glenwood it shows."


The People

Chief Executive Officer

Tasked with firm-wide management, Rowsell involves himself in all aspects of the investment process. He is a member of the Investment Committee as well as the Man Investments Management Committee. Prior to joining Glenwood, Rowsell managed an internal hedge fund at McKinsey & Co. Other roles have included managing director in alternative asset management at Carr Global Advisors, a subsidiary of Credit Agricole Indosuez, and director of research for Credit Agricole Futures. He has also acted in an advisory role to Goldman Sachs as a member of its Index Policy Committee for the Goldman Sachs Commodity Index. He has been a director of the Chicago Mercantile Exchange and an adjunct professor at the Illinois Institute of Technology, Stuart School of Business.

Chief Investment Officer

Jawor has overall responsibility for the oversight management of Glenwood's investment process and chairs the investment committee. He joined Glenwood in 2001, and has over a decade of hedge fund experience. He was previously co-portfolio manager with Sirius Partners, a fund of hedge funds where he was responsible for all aspects of hedge fund manager evaluation. He also brings to the Glenwood management his eight years at the First National Bank of Chicago's global derivatives business, where he was responsible for product development and marketing of OTC portfolio in interest rate, commodity, and equity derivatives.

Head of Portfolio Strategy

Also on the Glenwood investment committee, Kenary focuses on market research, portfolio strategy, and product development, and is the primary liaison between the investment committee and the North American market. Prior to joining the firm in 2005, he was the senior portfolio manager for HFR Asset Management's active portfolios, which he undertook after a brief interlude as an entrepreneur. He previously worked as a trader, analyst, and risk manager for alternative asset managers. Amongst the roles he has held was as a proprietary trader and analyst at Tudor Investment Corporation, then as a trader and risk manager at Sheridan Investments, an options-focused CTA. He began his financial services career as an analyst in the mergers and acquisitions group at Smith Barney. Kenary has also worked in legislative affairs at the White House Office of Management and Budget.