Tuesday, January 31, 2023

Man Group CEO questions use of pass-through fee structures



Man Group CEO Luke Ellis has questioned the ethics of pass-through fee structures and long lock-ups used by some multi-strategy hedge fund managers.

Speaking on the firm’s podcast, Long Story Short, Ellis said there was a question over whether longer lockups and passing through more costs to investors — rather than using a conventional management fee — was reasonable.

“You don’t have to push your prices up, you don’t have to push your liquidity out. In doing that, what you are doing is tilting the trade-off” between managers and investors, he said.

“I think we all make more than enough money to live extremely well and I think we have a duty of care to the people whose money we run. And so I think if we take 20 to 35% of the alpha in fees, we can run a very successful business. We can pay everybody very well.”

Pass-through fees “de-risk everything for the company, in this case the owner of the hedge fund,” he added. “But I don’t think it gives them a competitive advantage. It’s definitely been very good for headhunter fees, but I’m not sure that the savings of the headhunter community is something we should try and optimize.”

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Benefits of scale

Ellis, who succeeded Manny Roman, now the CEO at Pimco, to lead the world’s largest listed hedge fund firm in 2016, also said technology was driving the widening divide between larger managers, who control the bulk of hedge fund assets, and the rest.

“Large players will continue to take market share and [it] gets harder and harder for a small niche player to generate a consistent source of alpha,” he said.

“So I think that concentration of alpha generation, the concentration of buying power, the concentration of tech spend is part of a natural virtuous circle if you’re inside it and vicious circle if you’re outside it.

“We’re in the mid-innings of that and that the large players will continue to take market share and gets harder and harder for a small niche player to generate a consistent source of alpha.”

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Active management’s moment

Ellis said the shift away from low rates to a more uncertain market environment would favour active managers after a buoyant period for passive and inexpensive market trackers.

“With heightened inflation, that creates economic volatility, that creates market volatility, that creates significant opportunity for active management.”

He added: “Buy and hold on anything is out, but there are moments right now buying credit looks like one of the really interesting things to do. You can get some very attractive yields on things that aren’t going bust.

“And if there’s a big recession, you’re going to make a lot on the duration element and if there isn’t a duration, you’re going to make a lot on the credit spreads.”


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Crypto: speculative but tradable assets

Ellis discussed Man Group’s approach to the digital asset sector, which was hit by widespread declines in value and blow-ups including FTX in 2022. The firm was reported to be planning to start a crypto-focused strategy led by AHL money manager Andre Rzym.

“Cryptocurrencies are definitely tradable,” he said. “We trade them. Do I think it’s possible to come up with fundamental valuations for any of them? No, not at all. They are a purely speculative instrument. That’s okay as long as you trade it in a purely speculative way.

“You can trade it in a trend way, you can trade it in a relative value way, you can trade it in a mean reverting way. They can all make sense as long as you don’t try and trade it in a fundamental way.

“You can sit there and you can look at the fundamentals of a company and understand the valuation of the company over time, and you can do that based on fundamentals. You can’t do that with a cryptocurrency.”

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