John Wilkinson is a Senior Manager at Man Investments Limited, a member of the Man Group, the hedge fund business with a stock market value of £3.9bn and assets under management of $43bn. Based in London he is responsible for clients in the UK and Benelux. He brings more than 15 years of investment and managerial experience to his current role. He has a broad experience in money management, having started his professional career with PanAgora Asset Management in London, holding senior positions in both the fixed income and equity investment teams. He spent four years with Dutch insurer Aegon in The Hague, for whom he was Head of Equities. He is a CFA and an Associate of the Institute of Investment Management and Research (AIIMR), so he brought a deep understanding of investing with him when he joined RMF in November 2001. After Man Group acquired RMF he worked in a similar capacity, product distribution, for the enlarged entity.
What have you come to present at the conference today?
The core of what I have come to talk about is portable alpha for pension schemes. Of course I'm here to put across that the source of the alpha could be hedge funds. The concept of alpha, and portable alpha is well accepted in the United States and some Continental European markets for pension investment. It is the belief of the pension consultants (and ourselves) that the concept will become more broadly accepted, and we believe that the alpha stream from a fund of hedge funds is more consistent than from other sources.
The interesting area is linking portable alpha to asset/liability concerns. Trustees are generally much more aware of the liability side now, and of the mis-match between liabilities and assets. We think we have a solution to reduce that problem. Pension funds are exposed to longevity amongst pensioners, inflation and duration of liabilities. Pension schemes need investments that have a similar sensitivity to changes in interest rates as the scheme's liabilities, AND have a similar sensitivity to changes in inflation rates as the liabilities. The combination of interest rate and inflation swaps gives protection against both rising inflation and falling interest rates to a pension scheme. By adding portable alpha products linked to the UK Gilt Index or UK RPI we think the pension funds can achieve consistent annualised added-value (roughly 2 to 4% net) with a very acceptable tracking error and achieve a high information ratio. This sort of structuring possibility is under-exploited as yet.
How do you find the reception in selling the concept of investing in hedge funds to institutional investors?
Well three or four years ago the typical response was "what is a hedge fund?" Eighteen months later it was "tell me about RMF." Now the prospective clients know about hedge funds, have heard of RMF and they ask "What can you do to help?"
Is benchmarking relevant for hedge funds?
Benchmarking is relevant sometimes for our clients. We tell our clients to adopt as their expectation of hedge fund returns from our most diversified funds a level of LIBOR plus 3 to 5 percent. There is usually a volatility constraint too.
John, how did you get into the business with RMF?
I was Head of Equities at Aegon (the Dutch insurer) in The Hague and we decided to offer a mandate to manage a hedge fund allocation for the life funds. So we created a long list ourselves and then a short list and eventually decided to use one manager – RMF. Obviously one can get very close to a provider in a long process like that, and one has to understand how they operate, and find out something of them as business people, and I liked all those things about RMF. After a short while they asked me if I would be interested in joining them. Aegon are still a client of RMF so they must have been happy with the manager selection.
What did you like about the way RMF approached the business?
There were four things I particularly liked about RMF. I liked the modularity they have in the investment side. There are five single strategy funds of funds – Equity Hedged, Relative Value, Event Driven, Global Macro and Managed Futures. There are specialists for each strategy so that we have true expertise. Second, RMF had, and has, the capability to build funds of funds using a variety of styles. That is important so that we can answer the specific mandate needs of the clients. Nearly all our clients are investing in hedge funds to achieve some diversification versus traditional asset holdings, so a lack of correlation is common to all of them. The extent of risk tolerance varies amongst the clients, so some will be able to take more manager risk than others, or perhaps use specific combinations of the five strategies. That means that our clients' funds of funds can have anything from 20 to 170 managers.
The third thing I particularly liked about RMF before I joined was the depth of the organisation. Rainer (Marc Frey, founder of RMF) had built a business that had an infrastructure that institutional investors could recognise as substantive. It had the scale to meet the challenges of running mandates for them. In particular the blow-up risk was reduced by thorough due diligence. As far as I know RMF have not had a blow-up in more than 10 years. Avoiding blow-ups is worth a lot to the Investment Manager or Trustee Board of an institution investing in hedge funds for the first time.
I also liked the integrity of the individual managers at RMF, and I liked the forward thinking they showed.
How separate are RMF, Man Global Strategies and Glenwood?
Man Global Strategies has for the most part created structured products for high net worth individuals. RMF and Glenwood manage funds of hedge funds on behalf of institutional investors. There is now an informal sharing of information on individual hedge funds, but the investment processes are quite separate. Plus for the Group there is value in having the different brands.
In what ways is working with Man Investments different from working at RMF?
Man Group is a publicly quoted company and a constituent of the FTSE-100 Index. So for what I do, working with a UK and Dutch institutional client base, I've found it a lot easier to open the door with U.K. pension schemes to have that name recognition here.
After that there is little difference. The client base of Man Investments as it was did not overlap with the client base of RMF at the time of the acquisition. Man Investments sold structured hedge fund products mostly to private investors and RMF built funds of hedge funds for institutions. At the takeover Man Group bought into the RMF infrastructure and the business model. So there is a clear separation of investment content from distribution. The sales, marketing, and structuring teams work under Man Investments Limited, while the investment content can come from any one of the four key managers within the Group – RMF, Glenwood, Man Global Strategies or AHL. The investment professionals at RMF all stayed after the takeover, and they carry on doing what they were doing before. RMF is up to 110 staff now, and most of those are "front office" staff. Those of us involved in distribution at RMF moved to the Man Investments part of the organisation.
Did the performance of AHL Diversified (the main engine of several structured products) last year make any difference to your ability to sell products?
AHL is really another investment engine within the Man Group, and has little or no impact on the performance of RMF's diversified portfolios. Within RMF's Managed Futures style fund, AHL may or may not be one of 20 or 21 CTAs in the portfolio. Even there AHL is not a big factor.
The sales cycle to sell to institutions can be quite long – will you have to gear up your marketing and client servicing further to reach them and then retain them?
The larger pension schemes in the Netherlands may or may not use investment or pension consultants to help in decision-making about alternatives. For all the Dutch pension schemes there are not that many consultants, so in that market the salespeople of product providers are used in a different way than in some other markets. The Investment Managers of the schemes often use the salespeople as a source of knowledge of the marketplace. We are helping them move up the learning curve on investing in hedge funds. Each time one goes back and has a meeting the Managers have a better understanding. The first meeting may be about what a hedge fund is. The next stage can be a pitch in a beauty parade at which you discuss your management approach and your own infrastructure. After the mandate has been awarded there will be the on-going investment review meetings, and typically we might go along on a six-monthly basis. The consultants in the Netherlands tend to work with the schemes outside the top 80, and we work with the consultants to engage with those pension funds.
The UK pension market is dominated by consultants, and there are only a handful of them. We know them and they know us. We also sell to insurance companies in the UK and the Netherlands, and to a much lesser extent charities in the UK.
The Dutch are genuine long-term investors. Even if there is a shock to markets or to a strategy they will stick to being in for three years or longer. There may be a lot of handholding in a shock, but they will stay on board.
Asia has been a very hot market for HF product. Has Man Investments seen that?
We see significant opportunities in Asia. Man Investments has a sales and client service team based in Tokyo servicing our Japanese clients, while RMF has analysts there covering Asian hedge funds. Longer term, RMF would like 25% of its managers from Asia. (The analysts in Japan were originally based in Switzerland, and RMF offered them the opportunity to work in Tokyo for a period of time).
How do you provide transparency for investors?
Our end-client sees the fund names in the fund of hedge funds. That is, they know who manages how much of their capital. We also provide a performance attribution that tells our clients from where the returns have come. At the top level we do an attribution by the five styles mentioned, and also at the next level of attribution by strategy (Long/Short vs. Market Neutral within Equity Hedged for example). We also do an attribution which shows the return of the manager within each style. Our work shows that on a consistent basis 60-70% of returns can be put down to style and strategy allocation. (An interesting contrast to the bottom-up driven approach of Pacific Alternative Asset Management Company described in The Hedge Fund Journal issue 3.)
Is it possible to control both the level of absolute return and the volatility of that return, or do investors have to accept one as the natural product of the other?
Well it is fair to say that it is easier to control risk than return. Through the diversification by manager and strategy when we build a portfolio of funds we are highly confident of staying within the 2-5% target volatility level.
Are there any benefits of being part of a listed company?
There certainly are benefits for our clients. They have the reassurance from the Group being publicly accountable, and that means that there are additional reporting requirements for us versus other companies involved in the hedge fund business. The subsidiaries of the Group are in activities that are very highly regulated by the authorities in the U.K., the United States and other territories.
Apart from having the currency (via shares) to make take-overs and incentivise staff, I'd say that the other advantage we have as a public company is our balance sheet. We can use our financial strength to invest in new managers and seed new products. If AHL identifies a new futures contract or market as having return potential, the team commences with paper trading. We are then able to put some Man Investments capital at risk trading these markets. Only after that will they be trading client capital.
Who do you compare yourselves to in the hedge fund industry, is there anyone that you look at in the performance tables to see how they are doing?
Not really, I look at the performance of the traditional money managers and the investment banks. One can't say from one day to the next who we are competing against. A U.K. pension scheme mandate was awarded to three managers of alternatives recently, and there was someone in there called "Little Rock" or something similar and I'd never heard of them. There is little consistency in the views across the consultants – some of them are convinced that hedge funds are a boutique business with dis-economies of scale, and so mandates are sometimes won by others.
What is the best thing about your job?
The freedom I have. Also, I have the opportunity to use all the experience I have gathered over 15 years, and that is a rare thing.