Man Merges RMF and Glenwood

Revitalising the fund of funds model

Originally published in the April 2009 issue

Man Group’s move to amalgamate RMF and Glenwood, its two funds of hedge funds businesses, underscores the changes the hedge fund industry is undergoing in how risk and investment portfolios are managed.

The new funds of funds business unit is expected to be Man branded. It will handle the 50-plus portfolios of both funds of funds as well as house an expansion of managed account services from a current total of around 70 to double that figure. The restructuring is due to be completed by late May.

“Given the changes in markets and given some of the issues that cropped up last year, we and everyone else learned lessons,” Mark Chambers, head of European sales with Man, told The Hedge Fund Journal. “Also with the enormous wealth destruction of the past year, investors view the market differently. We are trying to position for what investors will want.”

Chambers says the reorganisation will help Man offer a wider variety of services to investors in a more transparent way. “We have taken people and process, infrastructure and business methods and put them into one entity,” he says. “It should not be overly difficult as it is people and systems we already have.”

Putting RMF and Glenwood into a new business lowers the curtain on a period of difficult performance in each unit. Glenwood, which last year absorbed another funds of funds operation called Man Global Strategies, has seen growth stall in recent years amid management changes. RMF, meanwhile, has suffered heavy redemptions and borne the reputational burden of being an investor in funds run by fraudster Bernard Madoff.

Introducing a new organisational structure marks an acknowledgement by CEO Peter Clarke that neither RMF nor Glenwood is likely to re-emerge as a strong engine of growth. Indeed, with cost cuts worth US$60 million unveiled across the group in a March trading update it seems that Clarke is preparing the firm for a period of consolidation during a time when assets, having fallen by 36% from the peak to US$47.7 billion, look unlikely to rebound quickly.

New HQ to reflect best advantage
Legal and regulatory teams at Man are considering best advantage in deciding where the combined funds of funds business headquarters will be located. But the lead operating bases for RMF in Pfäffikon, Switzerland and Glenwood in Chicago will be maintained as will the other main operating locations in Singapore, London and New York.

In the revamped structure, John Rowsell, chief investment officer of Glenwood, takes responsibility for all business, operational and risk functions. Herbert Item, the CEO and chief investment officer of RMF, carries on in the latter role in the new set-up. With both men reporting to Group CEO Clarke, it is clear where ultimate authority lies. This and the fact that the FSA may assume a pre-eminent role in international hedge fund regulation could mean that London will become the unit’s new headquarters.

The fact that Man is paying an unchanged US$0.44 per share total dividend for fiscal 2008-09 shows confidence in the future. Even with the strong bounce in Man’s share price in late March and early April the stock’s dividend yield is over 12%.

Man can afford the dividend because it remains profitable and expects to book pre-tax profit of US$1.2 billion for the fiscal year to March 31. There is also the underpinning of US$1.5 billion in balance sheet cash to pay for both the dividend and the working capital needed to finance growth. What new fund ventures or acquisitions Man is planning aren’t immediately clear. However, the group’s financial firepower makes it an obvious suitor in an environment that is likely to throw up some attractive opportunities.

Notwithstanding the difficulties experienced by RMF and Glenwood, Man has made a decent fist of the meltdown in the asset management sector owing to the strong performance of AHL. Getting the new investment management division up and running now will help prepare Man for a time in the future when AHL’s managed futures strategies may not perform with the same strength investors have seen in recent years. Lessening the reliance on AHL is also likely to be a further impetus to the group investing in new products or acquiring other hedge fund platforms. Indeed, acquisitions have driven much of Man’s growth since it entered the hedge fund sector in the 1980s.

New unit has AUM of US$23 billion
But shoring up and strengthening the existing funds of funds operation, which has an estimated US$23 billion in assets, is the immediate priority. The accelerated use of managed accounts demonstrates how Man is adapting to assuage the concerns of institutional investors. They have been stung by the liquidity crisis that has seen many hedge funds – though not Man – impose gates. The increased use of managed accounts may give some institutions the comfort boost to increase hedge fund allocations and may also help Man win allocations from rivals.

“The thrust for us is to have managed accounts at the underlying manager level,” Chambers says. “It gives enhanced riskand cash management. We have had a managed account platform in each business and they have been immensely valuable.”
The new business structure means that a combined platform is being established to provide legal, risk management and accounting services, offering ample economies of scale. Man hopes to gain an advantage by consolidating resources and speeding up the process of providing managed accounts to investors.

“There is a huge barrier to entry for other people,” says Chambers. “There are not a huge number of people who understand managed accounts. It is not a cheap option but is a preferred one for accessing managers.”

Setting up the new funds of funds arm is seeing Man unveil a fundamental change in how the seeding of emerging hedge funds will operate. Until now, RMF seeded new managers, but Glenwood only acquired that capacity when it absorbed Man Global Strategies, at one time the Group’s third fund of funds business, in 2008. These two seeding arms will now become one.

Funds now separated from seeding
Significantly, the combined seeding operation is to be shifted outside of the funds of funds business and operate independently. The new seeding unit will report to Rowsell, thus removing it from the traditional CIO reporting lines used previously. Seeding will still be done exclusively with Man Group capital but Chambers says this could evolve to a point where seed vehicles are opened to outside investors.

“It is not changing in practice, but it is formalised,” he says. “There is now a distinct wall between the funds of funds and the seeding business.”

Offering an enhanced managed account platform is designed to offer investors an operationally superior way to tap into hedge fund returns. Once that process is rolled out investors will be able to choose among the breadth of Man’s range of fund of funds portfolios and structured products. The new platform will also be looking to access single fund managers.

“We are happy to make a limited number of single manager names available to institutions and family offices,” says Chambers. “We have that capability and where we can make a single manager available we will.”

With its global footprint and unmatched distribution capacity, Man has carved out a lucrative niche in the investment management sector. Revisiting the investment process to tighten accountability and refining the pitch to institutional investors, which are now the biggest investors in hedge funds, is an astute move at the right time.