Man Group’s Ellis Says Some Hedge Funds Are Being Too Greedy
(Bloomberg) -- In the never-ending give and take between hedge funds and their investors, some managers are simply taking too much. Says who? Surprisingly, a hedge fund manager -- one of the biggest, in fact.
“It’s really important that most of the alpha goes to the clients,” Luke Ellis, who oversees about $124 billion as chief executive officer of Man Group Plc, said in a Bloomberg “Front Row” interview. “The client is the one taking all the risk, and the client should get the majority of the rewards.”
His issue isn’t with the typical hedge fund. Indeed, Man has funds that still charge the classic “two and 20” -- 2% of assets and 20% of investment profits in a given year. It also has products that cost a lot less, which explains why the company’s average fee in 2020 was 0.75%, or 75 cents on every $100 under management.
What irks Ellis are the expensive funds, many of them run by billionaires, that don’t target high enough volatility or, worse, lose money for clients. He won’t name them, of course, but some of the firms with funds meeting that description have included Bridgewater Associates, York Capital Management and BlackRock Inc.
The question isn’t whether a hedge fund should get paid to outperform, it’s how much. Ellis said that clients should keep two-thirds to three-quarters of every dollar of excess return, or alpha. Using his yardstick, a $10 billion fund with a two-and-20 fee structure would have to make a gross return of about $1.5 billion, or 15%, for the economics to be fair to all parties. Last year, the average hedge fund returned 9.5%.
“The more alpha you generate, the more fees clients are happy to pay,” Ellis said. “The hard thing is generating alpha. It’s a very competitive business and everybody would like to do it, and so you need to dedicate resources to it. Our view is the No. 1 resource you need to dedicate is technology.”
Man Group isn’t like most hedge fund managers. Instead of one or two main investment vehicles, it has dozens. The most advanced employ data science and algorithmic models to beat the market, competing with quant giants such as Renaissance Technologies and Two Sigma Investments. Some are less sophisticated, with flat fees of as low as half a percentage point.
Also, Man is based in London, not New York or Chicago, and is one of the few firms in the business with shares that trade on a stock exchange. The ethos of the place, as Ellis describes it, hardly compares with the cutthroat reputations of private firms such as Ken Griffin’s Citadel or Izzy Englander’s Millennium.
“What we offer people is a culture where they can work with colleagues in a collaborative, engaging environment -- where they can feel like they belong, where they know they’re doing something that’s not about making a billionaire a bit more billion-y,” he said. “We have a good time. We look after each other.”
Ellis, nevertheless, has to compete with those billionaires for talent while enduring the scrutiny that comes with being a public company.
Top funds sometimes pay portfolio managers a third or more of the incentive fee, an arrangement that can translate into tens of millions of dollars in a great year. At Man, the average compensation per employee is about $310,00, less than at Goldman Sachs Group Inc. Ellis was paid $3.15 million plus a long-term bonus in 2020.
“Can I attract, retain, empower smart, interesting people who can run the money and do the creativity for clients?” he said. “We do a pretty good job of that.”
Two areas of focus at Man are natural-language processing, in which computers read and digest vast amounts of text, and adapting the firm’s quantitative processes to markets beyond stocks and bonds. The firm was actively trading U.S. electricity during the February power outages in Texas, Ellis said. It also trades Bitcoin.
Another priority for Ellis is expanding its small footprint in private markets, where it manages $2.4 billion of assets, though doing so may require making an acquisition. Valuations in private equity, credit and real estate, he said, are “fantastically high” at the moment.
The objective is to give investors an easy choice: market performance in an index or exchange-traded product from someone else, or alpha from Man. So long as his technologists keep designing new models and developing new ideas that generate excess return, Ellis isn’t worried about demand for Man funds. But he doesn’t see much hope for firms that can’t.
“There are too many active managers in the world,” he said. “The fee load that you used to be able to get five, 10 years ago for running a pretty ordinary fund that outperformed one year out of four -- you could still charge 50 to 100 basis points of fees -- that’s an unreasonable fee load and I think those business models won’t survive.”
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