With over 32 years in finance Pierre Lagrange, Senior Adviser to Man Group (one of The Hedge Fund Journal’s ‘Europe 50’ managers), has been a bond salesman and trader, a private client stockbroker, an equityportfolio manager, a founder and entrepreneur, and a manager. His current role involves championing the application of cutting edge technology to the discretionary investment process at Man GLG.
Lagrange’s career trajectory did not follow any preconceived game plan and each episode, like his first step into finance, involved some serendipitous accidents as well as proactive choices. Lagrange had studied a hybrid business and engineering degree conceived by chemicals entrepreneur Ernest Solvay, at whose eponymous Brussels university he studied. The course was designed to prepare students for what was in 1980s Belgium one of the most sought after careers: working for a US chemicals company. The trainees who landed these roles could specialise in engineering or finance – and after having chosen the latter, there arose an opportunity for Lagrange to dive in at the deep end of company finance, gathering financial data from all over Belgium and upstreaming it via a chemical company parent to the overarching owner in the US. But “being several steps removed from the core objective of the business and remote from the main action” was already frustrating Lagrange, and so circled back to potential employers he had previously been in conversation with.
Enduring JP Morgan Network
Lagrange was hired by Morgan Guaranty (now part of JP Morgan), which had two offices in Belgium and activities beyond commercial lending. He was thrilled to be flown over to New York City for a “phenomenal training programme”, the alumni of which – including UK Government Home Secretary Amber Rudd, central bankers and big farmers – recently had a reunion in New York. Lagrange observes that “the impressive strength of the JP Morgan franchise and network is such that almost all of the former trainees are still doing business with JP Morgan in one way or another.”
At JP Morgan, Lagrange worked in bond sales and trading within the Treasury Department (which was close to, but still separate from, investment banking at that time, as Glass Steagal was not repealed until 1999). He became a kind of ambassador for his country, charged with selling Belgian government debt to the world at a time when this was a broadly unknown area for the global investment world. It was not the easiest sales pitch. “The national debt was a gigantic percentage of GDP,” Lagrange recollects.
A public sector hiring binge had led to ballooning debt and deficits, and Belgium was analogous to today’s emerging markets: with currency exchange controls on the Belgian franc, and artificially high interest rates offering a huge yield spread over neighbouring currencies such as Dutch guilders. But there were constructive aspects to the story. Belgium was no longer an existential question as secessionist agitation from both the French-speaking Walloons and the Flemish nationalists had waned (and the European Union was welcoming new members in the 1980s). Most importantly, the large pool of debt made for good liquidity (something that deteriorated later in his career) and JP Morgan was in a pivotal position. “JP Morgan both carried proprietary inventory and led the global syndicate,” he recalls. “We were in the privileged position to get the first call into the World Bank and Singapore sovereign wealth fund.” But after about five years in the role, Lagrange felt a new challenge was needed to fulfil his ambitions. He decided that Brussels was too far away from the largest financial markets and resolved to move to London.
Portfolio management business models
Lagrange also moved from bonds to equities but stuck with US banks, garnering two offers. “I had no regrets about turning down an offer to sell equity derivatives at Bankers Trust as I do not have the right type of mind for pricing and valuing options. It would have been an awful mistake!” he says. Instead, Lagrange was delighted with a sales position at Goldman Sachs that would soon grow into an investment role combining top down portfolio construction with bottom up equity analysis. For the third time, after a second five-year stint, Lagrange became restless and determined that the incentive structure of the business was not ideal. “The business model was a historic private brokerage model, exported from the US, which never fully matched what European clients wanted,” he explains. Lagrange and his partners exercised sound judgment in deciding that an asset management relationship was preferable (regulators in Europe would, roughly two decades later, largely kill off the commission-driven model via RDR rules). He soon realised that the aspiration to build a different business model would force him to break away from Goldman Sachs for many reasons, and primarily because “you could not build a franchise within the Goldman ecosystem.” Lagrange and his partners persuaded Lehman Brothers to plug a gap in their offering and build an investment management franchise. “We were encouraged by the sheer energy of the people at Lehman Brothers, and thought they would be a good venture partner because often the number two works harder,” he explains. A boutique structure was negotiated whereby Lehman handled administration, legal and compliance, but Lagrange and the other two GLG founders, Jonathan Green and Noam Gottesman, had operational autonomy and defined economics.
At first, Lagrange was not assured that the new venture would succeed as he never underestimated the value of the strong teams at his previous two employers. “At JPM or GS you must never forget that some part of how good you are is simply due to where you work,” Lagrange observes. “With football, for example, if you take a good striker out of Madrid or Spurs or Chelsea, they may not do well in the third division without a strong team and structure around them.” In fact, GLG grew in leaps and bounds. Consummate success at on-boarding private clients and endowments propelled the new entity to surpass its five-year business plan in just two years. This meant that the economics were no longer fixed and GLG was ready to spin off amicably – in what was not a complete separation. “Leaving a stake with Lehman meant that there was no negative energy from the spinoff and it also allowed us to function with autonomy at no cost to Lehman,” Lagrange expounds.
Stock-picking at GLG
GLG was not afraid to innovate in terms of strategy and product development. In 2000, around the top of the TMT bubble, Lagrange started one of the first discretionary, fundamental market neutral equity strategies at a time when most market neutral approaches were quantitative and/or statistical arbitrage. Occasionally, the style of management seemed to verge on borderline activism and include extensive engagement with the company and other shareholders.
Lagrange particularly points to situations where Man GLG’s teams made lateral comparisons between credit and equity valuations, noting that, “in certain cases, given a discrepancy between equity and credit valuations, I would be inclined to pay more attention to the credit team, whose focus will always be on getting repaid, rather than equity investors who are more focused on upside potential.” Looking at the markets currently, Lagrange suggests that there could be anomalies in the energy space. “We are brainstorming oil companies in terms of arbitraging equity versus debt valuations. Some firms are particularly vulnerable to the oil price and there can be interesting opportunities depending on factors such as debt covenants and what assets are used as security.”
IPO and transparency
Throughout this period, GLG’s team was growing and swiftly becoming a modern asset manager as its client base was shifting from private clients towards institutions, mirroring the wider industry. Having begun life as only three founders, GLG had already reached 30 staff when it became independent in 2000 (in 2017 Man GLG has over 30 strategies and 134 investment professionals). A growing headcount allowed for specialisation and delegation in what sounds like a low-ego culture. “We felt that each partner was suited to specific things, and we then hired better and smarter people so that performance could be generated beyond the three partners,” Lagrange recalls.
In the early 2000s the climate for hedge fund start-ups was very buoyant (not least since hedge funds, on average, generated positive returns during the equity bear market years of 2001 and 2002, according to several indices) so GLG used equity to incentivise and retain staff. A public offering seemed to be a logical next step, although in 2005 no other pure play alternative active managers had floated on the NYSE and precious few were listed in London. Unease around going public was unsurprising. Even today, being a public company compels greater transparency than some private companies offer. In 2007, prior to investor and regulatory demands for increased transparency following the global financial crisis, the difference in disclosure levels between GLG and some private peers would be greater.
Nonetheless, Lagrange and his partners ignored some of the brokers, who were against the listing, and instead listened to employees, who were supportive of it. Lagrange says they never looked back. He welcomed the chance to engage with former sell side colleagues and broker advisers on a deeper level. “Scrutiny is actually a very good discipline on cost management and allocation of resources and, if we had the choice all over again, I would still float the business. We benefit from people scrutinising us in the way that we look at other companies all day long. We had a good dialogue with the sell side around optimising return on capital short run and long run,” he says. Lagrange has spent more hours on the other side of the investor relations table and he admires companies which are “clear on key performance indicators, good at corporate management and therefore generally get a fair valuation from the market”.
Regarding the valuation of asset managers generally, Lagrange acknowledges that low multiples are ascribed to the optionality of performance fee earnings – but does not see this as unique since he also reckons little value is attributed to commodity-trading divisions of oil companies that can have similarly volatile earnings patterns. In any case, Lagrange makes clear: “the volatility of GLG’s share price was not a concern for employees at the time, as they were more interested in participating in the future of the company than in divesting their stakes.” Though GLG floated close to the top of the stock-market, the founders hung onto the majority of their stakes.
For Lagrange, GLG’s worst moment – the collapse of Lehman in 2008 – came about a year after the flotation. By this time Lehman’s stake in GLG was down to about 11% and GLG’s exposure to Lehman had been cut back. “We thought there could have been a problem, but did not know what, and thought we were well prepared with legal and custodial arrangements. We had no balances or assets in custody with Lehman but did forwards and clearing with them,” Lagrange details. “It is still frustrating to me that investor and corporate assets were trapped in the bankruptcy and a quagmire of legal and regulatory complication. We sold some of the claims and worked out others,” he says.
Two years later, counterparty risk was being mitigated in many more ways but liquidity risk and factor risk seemed more pertinent. The repercussions of the crisis – both in terms of bank deleveraging and new regulations – contributed to lower liquidity in some parts of the financial markets. Lagrange reckons banks’ retreat from proprietary trading (partly due to the Volcker Rule) contributed to diminished liquidity, and reduced opportunities for some strategies. He noticed that “short term inefficiencies had been arbitraged away or disappeared, sometimes due to insufficient liquidity, especially on the fixed income and credit side. You could trade larger amounts without market impact ten or twenty years ago.”
In 2010 when GLG was bought by Man Group, becoming Man GLG, the firm started to look at risk through a more quantitative lens. Lagrange observes that “idiosyncratic, or stock specific, risk is small compared with factor and style risks such as value, momentum, growth, quality, dividend yield, geography and industry.” For Lagrange, “the shift towards market neutral strategies has replaced market beta risk with factor risk, which has actually increased because more people are exposed to it.” (Many long-only and passive strategies such as ‘smart beta’, ‘alternative beta’ and ‘alternative risk premia’ strategies can also be heavily exposed to factor risk). Overcrowded factor exposures are a heightened risk. A synchronised unwinding of portfolios can cause substantial selling of particular names, as was seen with the so-called ‘quant meltdown’ a decade ago in August 2007, which one manager famously described as a 25-standard deviation event. “We understand factor risk better now and it’s a key focus for us, as management of factor risk is more important than ever,” says Lagrange. Indeed, Man GLG has been working with Man AHL, utilising its quantitative expertise in defining and measuring factors to help the business identify its own exposure.
To home in on one factor, ‘value’ investing (when defined by broad and crude measures such as value indices) outperformed for decades but has markedly underperformed over the past decade. Lagrange admits that he “has no idea what might cause a recovery in value because the traditional catalysts have not worked”. In his role as a roving and globe-trotting mentor for portfolio managers and analysts at Man GLG, Lagrange is conscious of the need to carefully manage exposure to the value factor in some sectors. Secular megatrends such as internet retailing have powered ahead like the world’s largest ships – super-tankers – leaving in their wake many superficially cheap stocks, which look like the sirens of mythology, leading value investors into traps.
“Amazon has contributed to the destruction of value in retail, REITs, home furnishing and mid-tier shopping centres,” Lagrange observes. “These appeared to be in value territory but kept on declining into deeper value.” And he is of the opinion that retail-related real estate may have more downside. “Currently, low interest rates have disguised the destruction of value and prolonged the life of zombie businesses, by for instance making it easier to finance empty shopping malls.” A day of reckoning awaits when interest rates rise: “in my view, this could be an accident waiting to happen – for instance, walking to work in Manhattan at Man Group’s New York offices I spotted plenty of empty shops,” he warns.
Mentoring and self-improvement
Sniffing around for value traps is one example of Lagrange’s coaching role. “I try to see what is wrong, what can be improved, and to play devil’s advocate. In all of the companies I look at, including Huntsman, the Savile Row bespoke tailors I have invested in, I apply the same approach. The aim is that through collaboration and teamwork, one plus one equals three.” Man GLG’s CIO, Pierre-Henri Flamand, also has a 360-degree view of the business. Lagrange finds Flamand “has extraordinary bandwidth and capacity in terms of mentoring investment managers”. For at least six years, Man GLG has been applying quantitative and behavioural techniques to identify portfolio managers’ strengths and weaknesses. “If you can show them that half of their time is spent on activities generating return on equity of 3%, and the other half makes only 1%, then they should spend more time on the first activity,” explains Lagrange. This performance attribution analysis to promote self-improvement is being spearheaded by co-heads of European long/short, Fabian Blohm and Neil Mason. Blohm came from Citadel while Mason was at the Harvard Endowment fund. Performance measurement has been an important theme at Man GLG for some years. Man GLG was one of the first active players in hedge funds to adopt the GIPS (Global Investment Performance Standards) and Lagrange says he “advocates regulations that promote transparency and normalisation.”
A hybrid approach
Quantitative analysis applies both to appraising portfolio managers and to the investment process. While Man Group remains fully committed to discretionary investment management, it is actively exploring how quantitative techniques can support traditional active management. Man GLG is at the forefront of this trend. Though it is branded as the discretionary arm of Man Group, with Man AHL and Man Numeric as the systematic divisions, Lagrange characterises Man GLG’s investment process as being a kind of hybrid, “man and machine”, whereby the discretionary portfolio managers are supported by quantitative techniques. Man GLG is selectively using technology, including machine learning techniques, to give its portfolio managers additional tools through which to interrogate the vast amounts of data available, but is certainly not going completely digital.
Man GLG is slicing and dicing the investment process to work out how human and quantitative inputs should be balanced for different objectives. For instance, macro and index trading, data mining, polling, modelling, and managing momentum maybe done better by machines and Man GLG hired William Ferreira, who had previously been a technology manager at Man AHL, as Head of Machine Learning, to work with its portfolio managers to provide them with quantitative toolkits. In contrast, the analysis of individual companies, from a credit or equity perspective, has more limited quantitative input.
Man GLG started harnessing techniques traditionally found in quantitative investing in early 2015, around the time of its 20th anniversary (which The Hedge Fund Journal covered in our feature ‘Discretionary Man GLG Turns 20’). This was a natural consequence of the synergies between divisions of Man Group, which have been helped by rotation of senior management – in executive, operational and investment functions. COO, Carol Ward, moved from Man AHL to Man GLG. “The former head of Man Group was an ex-GLG person, Manny Roman, and now an ex-FRM and ex-GLG person, Luke Ellis, is managing Man Group. Sandy Rattray joined GLG and he then moved on to Man AHL.” The culture is more and more collaborative, but there are still clear differences in investment approach. “Man AHL is mostly a top down quant macro place, while Man GLG focuses purely on discretionary investing,” Lagrange explains.
Man Group’s first half results announced that all London teams will be based in the same City location by late 2017. The acquisition of Man Numeric in 2014 (based in Boston) has added another counterpoint to the discussions. Man Numeric is, like Man GLG, investing in single stock equities, but on a purely quantitative basis. “There is so much we can learn from each other. Man Numeric’s teams want to understand why relationships between data and share prices work while Man GLG’s portfolio managers want to find out how Man Numeric quantitative processes discovered these relationships.”
New frontiers of data
Important though these factors are, they have been known about for decades and Man GLG is searching for alternative data sources to obtain an edge. “Every day we add new sources of data, such as Twitter feeds, surveys, tax receipts, satellite readings, word searches, and Google analytics,” explains Lagrange. “But the raw data is of limited value as it is incomplete and lacks integrity, so our quantitative managers need longer lookbacks and frequency distribution to make sense of it,” he continues. Meanwhile, Man GLG’s discretionary analysts apply their judgment and interpretation to the data, and they might make use of shorter time series. “It is a lot of work to clean the data and make it relevant,” sums up Lagrange, who has been invited to speak on the European internet ecosystem, at the Noah Conference in Berlin and London. Most of these data sources did not even exist when Lagrange began his career. Indeed, as markets continue their inexorable evolution, Lagrange is committed to keeping his finger on the pulse – from understanding how technology is revolutionising investment, to the macroeconomic dynamics shaping this global landscape. Add to this his philanthropic activities and chairmanship of the Huntsman tailoring business, taking a step back doesn’t seem to be on the horizon.
Engineering MA, Solvay Business School, Brussels
JP Morgan, government bond sales and trading (Brussels)
Goldman Sachs, responsible for managing global equity portfolios (London)
• GLG Partners founded, initially within Lehman Brothers
• Partner and Managing Director Equities
GLG becomes an independent business
GLG lists on the New York Stock Exchange
• Acquisition of GLG by Man Group, becoming Man GLG
• Senior Managing Director, Man GLG
• Member of Man Group’s Executive Committee
Chairman of Man Group Asia
20th anniversary of Man GLG
Senior Adviser to Man Group