By Neil Wilson
There are various reasons why hedge funds, in previous times derided as being from the "cowboy fringe" of asset management, have become ever more institutional. Pressure on the industry—both from regulators and investors—to move further in that direction has intensified since the recent financial crisis. Such details perhaps explain why the proposed merger of Man Group, listed on the London Stock Exchange, and GLG Partners, listed in New York, is being hailed in some circles as a game-changing event: The hedge fund business really is going mainstream.
The combination of Man and GLG is indeed awesome in scope. Together, the combined group will have assets of more than $60 billion. And it will be strongly positioned for the expected huge growth in onshore products globally, notably through the European UCITS framework—where GLG has already raised more than $1 billion in recent months and where Man has recently made its AHL managed futures strategy available to investors for the first time through the UCITS format.
In announcing the deal, Man Group CEO Peter Clarke and GLG co-CEO Noam Gottesman described it as "transformational"—in product diversification, distribution, diversification of revenue streams and cost synergies.
Scale, diversification, resources, distribution: These will be key attributes required from the leaders in the alternative asset management industry in the future—not forgetting the small matter of performance. And these are what a combined Man-GLG group should be able to deliver in spades.
So there are plenty of reasons why the combination of Man and GLG should work. Whether it will is another matter. Big is not always better. And putting together businesses that have strong and idiosyncratic cultures, and whose main assets are people, has often proved difficult.
Amid the analysis of the deal—which has been plentiful and generally supportive—it has also been noted, at least in some places, that both sides probably need of something of a lift.
In Man's case, its assets under management, revenues and profits have all slumped during the past two years, even though AHL made 33% returns in 2008, effectively carrying the group through the most tumultuous phase of the financial crisis.
Where Man got hit first was on the multimanager side after it was revealed that its Swiss-based RMF fund of funds unit was among those that had exposure (if only to a modest extent) to Madoff. Man responded to this blow in robust fashion with a wholesale restructuring of its multimanager business—an ambitious undertaking but expected take at least two or three years to really bear fruit.
In the meantime, unfortunately, the previously unstoppable AHL engine of the business also seems to have stalled—at least temporarily. Like most CTAs, it had a poor year in 2009—a major reason for the sharp fall in the group's fee income last year.
In GLG's case, the business was affected much more rapidly during the turmoil of 2008, with the performance of most of its funds and assets under management badly mauled during the tidal wave of redemptions and market panic. Such was the speed of the decline that GLG's move last year to acquire the long-only business of SocGen Asset Management in the UK was seen by many at the time as a way to avoid breaching covenants on its total AUM.
In terms of performance, GLG recovered pretty well over the past year, with the majority of its funds making strong gains and getting back above their high-water marks. But by assets, the size of its hedge fund business remains a long way below its historic peak—which is one reason, perhaps, why linking up with Man's powerful distribution platform seems so attractive.
GLG has of course been written off in some quarters at various times, notably when previous star managers such as Philippe Jabre and Greg Coffey have flown the coop. But it has always found ways to reinvent itself—usually by finding more star traders, one reason why I always thought it would be foolhardy to write off GLG.
But the whole culture of the star trader/star manager system, so deeply embedded not only at GLG but throughout the industry, is very different from the much more low-key, process-driven, team-based approach at Man and AHL.
It will be interesting to see if and how the two groups attempt to put these two different cultures together, and how successful they will be.