25 years, 25 CEOs: Peter Clarke, CEO, Man Group

25 years, 25 CEOs: Peter Clarke, CEO, Man Group

The crisis did raise questions about quantitative trading strategies; in particular banks’ reliance on mathematical models was called into question by the crisis. But we must separate here the models’ purpose from their implementation.

I suspect that the concern regulators had – even before the crisis – was whether the risk models of banks were accurate when it came to the fat tail events – in other words did they accurately model how bad things could get? Here the failure was in cumulative impact analysis, in particular around accurately assessing the impact of failing liquidity.

It’s also worth pointing out that the selling was to do with the fact that people had set their stop-losses at the same level – say a drop in the markets of 4% over a week – rather than simultaneous selling of the automated program trading funds per se. Hedge funds were actually net buyers as the markets fell but the selling pressure was created by banks calling in their leverage and investors making redemption demands.

Now, the reason this became a problem in the cash equity markets was that these markets need a certain level of risk capital to lubricate them. Usually this is supplied by the banks but it dried up. By contrast, the futures markets, in which funds like AHL trade, don’t need that same capital to keep them functioning; liquidity is maintained by the more natural balance between the hedger and buyer of risk.

Assets are now flowing back into hedge funds because, broadly, the hedge fund community did a good job of risk management during and after the crisis. Notwithstanding the fact that there was correlation across strategies where you wouldn’t have expected it, risk-adjusted returns and draw-downs across the sector were good (I’d separate out the hedge funds of funds here that had a worse experience and where most of the gatings occurred).

I think also the strength and robustness of the businesses at many hedge fund firms have helped to restore trust and give a sense to investors that the sector is strong and sustainable.

Finally, the sector has benefited from the shift of investors’ principal concern towards liquidity. Rather than investors saying, as they once did ‘we want a certain percentage in private equity, in hedge funds and in property’, now they are saying ‘we want specified proportions available daily, available weekly and available annually – and an amount we don’t need for 30 years.

Hedge fund strategies sit well across that liquidity spectrum; managers have managed to shape their funds around these changing portfolio requirements quite effectively.

When AIFMD emerged from the European Commission in draft form, it provided a challenge for the alternatives industry that it hadn’t faced before. Both the hedge fund and the private equity community is a collection of disparate and fragmented managers of private capital which, up to then, had actively avoided publicity. Suddenly to come together to voice their concerns about the draft directive was difficult.

Here the Hedge Fund Standards Board was crucial, in particular through its work with the President’s Working Group in the US. The Alternative Investment Managers Association also helped bring participants together.

But the real breakthrough was when investors joined the lobbying effort to amend the directive , and a number of major UK and global investors spoke publicly about the dangers inherent in the draft. It’s easy to dismiss a group comprising just managers with the argument that they’re just trying to preserve their businesses. But when investors said, “Don’t do this in our name,” regulators had to listen.

You’re seeing the consolidation trend that’s at work in the wider asset management sector at work to a lesser extent in hedge funds. To an extent our acquisition of GLG was an example of this. But it wasn’t about scale within a single type of fund: pure quantitative strategies face capacity issues when they increase their size which forces them into markets beyond where their expertise lies.

But if you mix quantitative and discretionary strategies, you do get scale benefits. For example, AHL trades global futures and forward FX markets on a large scale so we have all the plumbing with the exchanges, the clearing houses and the banks – in these areas size matters. This means GLG can benefit from the price pressures that we’ve already created through AHL to get good rates on their trades.

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