Man’s Desmyter on what asset allocators want today

When a big sovereign client invited Man Group, the world’s biggest listed hedge fund, to speak at its London offsite earlier this year, Man sent along its president, one of its chief investment officers and its chief technology officer.

The president, Steven Desmyter, spoke for about 5% of the time. The chief technology officer, Gary Collier, spoke for the other 95%. The client, a key investor with Man, asked all sorts of structural questions such as what was the company’s approach to outsourcing and what its experience was of pay competition versus the technology world?

“These are not conversations that you used to have with an asset allocator 10 years ago,” says Desmyter now. “But they are commonplace today.”

Go back that far and it is unlikely that Man would even have sent a CTO along to such a meeting. Man today has a specific reputation for being particularly technology-driven, so questions on that topic are to be expected. After all, the hedge fund spent about $600 million on technology in the last five years alone, and almost half of its roughly 1,800 people are quants and technologists.

But even so, for Desmyter, the story is an illustration of just how relationships have changed. Clients want fewer counterparties: intellectual bandwidth is limited, and so are other resources. But there is also a positive spin to the rationalization, the feeling that they can do more with fewer. And as Desmyter notes, that is somewhat price-driven but it is also complexity-driven.

The investment world becomes ever more complex, with potential fallouts from mistakes ever greater, and while some of that is to do with markets, a lot is to do with operational challenges.

“Institutional allocators need to be better equipped today than 10 years ago,” says Desmyter. “The demands of complex markets on their limited – and often downsized – resources mean that they need more help.”

With that in mind, clients like this big sovereign are grabbing every opportunity to make their pool of capital work harder for them and getting more added value by viewing their relationships with firms such as Man as partnerships rather than as merely places to put their assets.

It is why one of the most important areas at Man is what it calls its solutions business. About two thirds of the roughly $165 billion of assets under management at Man have some degree of customization. These are not off-the-shelf funds that clients simply walk in and buy. At the same time, most of the company’s clients now have multiple product relationships with the firm.

“It means that customization is not just a side story – it’s the core of what we do, and the bulk of our growth has been in that area,” says Desmyter.

Total assets under management are up about 55% in the last five years and have doubled in the last eight. A big part of that growth has come through its solutions business.

These days that falls under Desmyter’s responsibilities. When new Man Group chief executive Robyn Grew took over from Luke Ellis in September 2023, she asked Desmyter to step into the role of president of the firm. In that position he spends time thinking about broad strategy, but day-to-day he is overseeing some 260 people in sales and marketing and more than 100 in the solutions and responsible investment area.

If increasing complexity is one of the themes that has driven the need for a more bespoke solutions offering, the other is the variety of needs at the large institutions that drive Man’s business.

“There are a few things that always come up, but when you consider the regulatory differences, the differences in liability profiles or liquidity needs between a UK insurance company, a Middle Eastern sovereign or a superannuation scheme in Australia, you are talking about very different requirements and objectives,” says Desmyter. “You want to give a solution or a portfolio answer that is adapted to all those different challenges.”

Man has grown formidably. Assets under management reached a record $168 billion at the end of 2023, up 17% over the previous year and more than doubling since 2017. In 2006, they were just $50 billion.

From an earnings perspective, too, the firm looks resilient. Against a tricky backdrop for the industry, revenues of $1.2 billion in 2023 were a drop from the records of 2021 and 2022, but it was still the third best period. Profitability saw a bigger fall, on the back of a very strong prior period. Core net management fees rose 4% in the year and are up 35% since 2017.

In her full-year earnings commentary, CEO Grew described the firm’s performance as “solid” and noted that the firm posted positive investment performance for the year of $9.7 billion. And while some of Man’s strategies had posted double-digit performance, others – notably trend-following absolute return – were less suited to the rapid shifts caused by both the regional banking crisis in the US and the changing expectations for central bank policy rates later in the year.

But Man saw $3 billion of net inflows in the year, some 5% ahead of the industry average.

While some growth has been inorganic – there has been a slew of acquisitions over the years – much has been organic, and to listen to Desmyter that priority seems unlikely to change.

The firm integrated AHL – named after its founders Cyril Adam, David Harding and Martin Lueck – in 1989, a move that was the genesis of Man’s heritage in systematic investment. In 2010, it bought GLG Partners, which was how Desmyter came on board, having joined in 2002 through the well-trodden route from Goldman Sachs. Man then bought FRM in 2012, Numeric in 2014, GPM in 2017 and Varagon in 2023.

Man’s commodities brokerage unit, meanwhile, was spun off as MF Global in 2007 – and a good thing too, as it turned out. The future turned out to be far happier for the investment arm, as MF Global almost immediately stumbled from one crisis to another. A rogue trading incident and subsequent fines came in 2008, as well as intermittent worries about the firm’s liquidity.

MF Global finally succumbed to bankruptcy in 2011 after an ill-advised strategy that involved buying distressed European sovereign debt in the hope that it would not default and would be highly profitable if it matured at par.

But using a form of repo to shift the holdings off-balance sheet in the meantime exposed the firm to margin calls, leading to losses and credit downgrades, and eventually a run.

Today, Man Group is broadly structured into three main areas.

The first of those is systematic, the company’s heritage, with about $100 billion invested in various quant strategies. That is divided between algo-driven in-house manager AHL, using macro models and commodity trading adviser (CTA) funds and the like, and Numeric, which predominantly uses a fundamental-driven, bottom-up approach, mostly in equity.

The second part is the discretionary business, which emerged from a reorganization earlier this year that saw a number of legacy brands merged, including GLG, private credit manager Varagon, and Man’s private markets unit GPM. The reorganization was part of a broader focus on credit for the firm, one of Grew’s key objectives.

“We had a lot of brands, some of which we had gained through acquisitions, and we had started to surpass that,” says Desmyter. “We decided it was time to simplify the way we communicate to our investor base and focus on the Man brand.”

The more important part of that move was arguably the combination of the private and liquid discretionary strategies, meaning that the discretionary unit now comprises a wide variety of equities, credit and real assets.

The Man Solutions unit makes the third of those areas and is intended as a conduit into the other two engines of systematic and discretionary, but it is also where Man houses its strategy and multi-strat offerings.

Growth is expected from all three, but in different ways.

“We will continue to seed and grow a lot of strategies,” says Desmyter. “Systematic is just so natural for us, and we will hire people, but the idea that we would do an acquisition there is unlikely.

“On the discretionary side, we have been public that we are always interested in good credit managers and opportunities, specifically on the illiquid side. We have expertise, but we want to get more scale.”

Beyond that, it is about not messing things up.

Technology, and the need for continued investment, remains a big priority. It is as expensive and competitive as ever, but Desmyter argues that not only does Man have an edge there, but that a lessening of the fierce bidding for talent that existed even just a few years ago between technology firms themselves has made it easier for those in other industries to secure staff.

“It’s also less uncool to be working in finance as a tech person now,” he adds.

Euromoney wonders if that is because it is harder to tell the difference between hedge funds and technology firms.

“There’s some of that, but I also think we have tried hard to be more appealing," says Desmyter. "We are very conscious that you need to have different personalities across our three areas, and also that allowing people to have a remit to explore and do interesting analysis is also very important.

“It’s not just about pay.”

Given everything that has happened in the last few years, it seems surprising to hear Desmyter make even a slight bull case for banks as a sector. For the last 15 years or so, ever since the global financial crisis, banks seem to have been the subject of existential questions.

Desmyter considers the sector from the perspective of a counterparty and thinks there is potential for new entrants into some areas.

“Whether it’s shadow banking or owning the trading space, or the buy side expanding their areas of expertise and ownership elsewhere, one thing that hasn’t gone away is that you need your counterparties,” he says. “Sure, you can try to disintermediate, but if you think about how so many European banks have exited the prime brokerage business, that is not a good thing. There is surely space for some more players there.”

For a hedge fund like Man, prime brokerage is obviously ‘top of mind’, in the industry jargon. But Europe’s banks are still reeling from the chaos wrought by Archegos Capital Management, the family office that blew up spectacularly in 2021, seriously hurting its prime brokers in the process and driving some out of the business.

“From a risk-management point of view, you want to have multiple counterparties,” he says. “If someone had told you that some banks would have stepped away or would be gone altogether, and that others would look like they were giving up on it, you would have thought: ‘OK, that’s a scenario, but others will step in’.

“But nobody has.”

Fewer and fewer names are dominating the industry. Markets are also bigger and leverage is substantial, raising fears of systemic risks as exposures become concentrated.

“All of a sudden, rather than the banks having to worry about me, I have to worry about the banks,” adds Desmyter. “And that’s new, but ironically also maybe a bullish margin opportunity.”

He reflects on other critical moments for the sector, including the start of the pandemic, when so much was unknown and all eyes were on policymakers to ensure that frightened markets could continue to function.

“It was different in 2020 to 2008, partly because we had seen the scenario in 2008,” he says. “Liquidity is a different topic, but in terms of proper counterparty risk it was not as extreme as 2008. We stepped through the abyss back then, and I think it was so traumatic that the assumption is now that the stop-gap will be there.”

It was also more gradual. While closing its borders was a big moment for the US, the country had been able to watch the spreading panic in Asia and then Europe.

“And yes, you had sub-prime in 2007 already, but the Lehman Brothers moment was pivotal and an overnight shock, so it was different,” Desmyter says.

Does that mean the weekend of the collapse of Credit Suisse was similar?

“In the end, it was a well-flagged transaction,” he says. “I wouldn’t put it anywhere near the fear factor or perceived contagion risk of the Lehman experience, not because people were seeing it as idiosyncratic to Credit Suisse but because there was already a playbook.”

There can be substantial relationship fall-out from crises, too. Memories are long at a firm like Man, with its ultra-conservative approach to counterparty risk. After the 2008 crisis, it didn’t trade with some names for a decade.

One relationship that sounds as strong as ever is with London, where Man Group is headquartered. It is a city whose position in the world of finance has been questioned by some in the wake of Brexit and by others because of its apparently unloved equity market.

With high-profile homegrown names such as semiconductor firm Arm famously choosing to list on Nasdaq last year and domestic IPO volumes remaining depressed, UK government and financial regulators are grappling with how to breathe new life into an equity market that has for years been seen as something far from the kind of source of growth capital that they would like it to be.

Desmyter draws a distinction between the position of London as a financial centre and the debate around the attractiveness of the UK equity market, and leaves no room for doubt about the firm’s view of London as a base for Man.

“This is our home and we’re not going anywhere,” he says. “We are UK-listed and we will remain UK-listed. We are very committed to the city; we’ve grown here and expanded. Structurally, we back London and I don’t see that changing.”

When it comes to the equity market, his take is more nuanced, and while he recognises the challenges London faces, he doesn’t think there is any specific structural reason that can be tackled to suddenly increase dealflow.

“Back in the day, you would have had a UK equity desk and a European equity desk, and there was a natural demand from institutions for what was a deep, diversified liquid market,” he says.

Over time, however, the UK market became increasingly international and energy-focused. On top of that, it has faced challenges that include other markets become deeper and more liquid, the mergers of the Euronext markets, and Brexit.

“It would be hard to argue that the UK equity space has been the most exciting market for many investors in recent times,” says Desmyter.

He doesn’t want to be quoted on strong market views. That is not just his preference; it reflects something fundamental about the way in which Man works.

“Our systematic strategies obviously don’t have a market view,” he says. “But the other thing is that we don’t actually have a house view. We don’t have one CIO who says we are bullish on this and bearish on that.”

It makes the firm a little different to some. There are single fund or big multi-strat houses where a founder or figurehead at the top might be taking big views and impacting risk throughout the portfolio. But Man – while trying not to run actively competing strategies – is comfortable for its people to have very divergent market views.

“I actually find it strange to do otherwise, because in most of our conversations now we are doing multiple things with one investor,” says Desmyter. “If it’s all the same view, then the client has no need for different exposures.”

There are more fundamental reasons too. With factor risk – or even just basic market risk – being so present in all kinds of strategy, the appearance of diversification by being invested in emerging markets debt on one hand and long-only equity on the other, for example, is increasingly illusory.

“If I have a similar view, then it will mean that whatever real risk I am running will always transfer across all these strategies irrespective of the asset classes I am in,” says Desmyter. “So I would much prefer everybody having different views – that’s much more diversifying.”

When it comes to investor appetite right now, it is hard to look past credit.

“It’s clear to me that demand for yield, whether it is corporate or sovereign, is very strong, and I don’t see it abating,” says Desmyter. “For sure that can change, but we are in a world where for 25 years you were getting nothing for your cash – if anything, it was costing you.”

Certainly, credit looks appealing now compared to the volatility and liquidity risk that investors might take in other asset classes.

Desmyter is still cautious, though.

“That liquidity risk exists in some parts of credit too, but it is just such an opportunity versus what we have seen before,” he adds. “If you can hit 4% or 7%, depending on the type of investor, you are ticking a lot of boxes.”

What will slow that down? The risks that are out there are well-known: investors spend lifetimes trying to work out ways to diversify away from or reduce beta exposure and market risk.

“Every year people think they have solved that, but it comes back even more,” says Desmyter.

Worries about liquidity are the other constant.

“It has calmed down a bit, but frankly when you consider the LDI crisis in the UK, or the pandemic, there have been some scare moments that while not quite systemic were still very concerning,” he says.

Those kinds of concerns certainly seem to have abated enough to allow for record recent interest in investing in private credit, though. As of the end of 2023, Man itself reported nearly $11 billion of assets under management in US direct lending, a figure that it only started reporting in the third quarter.

“The appetite for private credit is very strong,” Desmyter says. “For every person that talks to you about valuation, I can find two that tell you it’s a structural buy and still a small part of the market.”

Capital efficiency is another of the big priorities for Man’s clients at the moment, running positions with higher volatility. It is not a strategy that works for everyone, but large institutions will often be more focused on risk than on absolute volatility levels.

Fourth is the age-old desire to manage tail risks.

“It’s hard to be a bear in my career, but we were joking the other day that the worst place to be is an equity strategist, because by definition you will be way more measured than any other equity market participant has been over the last 20 years, so you will always look like you don’t know what you are doing,” says Desmyter.

“But the institutional client base that we talk to do care, and they have this fiduciary responsibility and sense of long-term planning, where if they can manage their tail risks, if they can control their drawdowns, that’s ultimately the best way for them to reach their return targets.”

Man cannot brand itself as 'tech-empowered' without having a view on the topic of the day – artificial intelligence. And while the mass availability of large language models has brought it to the forefront of many people’s awareness for the first time, the reality is that financial market participants have been using types of artificial intelligence and machine learning in data models for portfolio construction and to guide trading processes for the last 10 years.

But clearly the field is evolving faster than at any time before, as illustrated by this week’s news that the next iterations of Meta’s and OpenAI’s large-language models may well mark an important new breakthrough in the development of reasoning capabilities.

Desmyter cannot remember having a meeting in the last 18 months when AI has not been mentioned.

Man has implemented its own generative AI portal internally, called – predictably – ManGPT, and which is deployed throughout the whole organization.

“AI is more of an enabler than anything else,” says Desmyter. “We use it for things like [environmental, social and governance] incident prediction or security forecasting, and perhaps the most exciting use is in NLP [natural language processing] sentiment analysis.

“Those are real, concrete use cases, but across the industry the gap between capital expenditure and use case is definitely still there. It is clear that the size and nature of the addressable market is not yet obvious.”

For the moment, the more relevant question at Man may be whether AI has the potential to change the securities trading environment in which the firm operates, or else change materially the way in which it invests. After all, with some $100 billion of assets in systematic strategies, Man is probably in the top three in the world there.

“On the former, that’s always a risk, but on the latter, I am more confident to say no, because it’s already how we operate,” says Desmyter. “It’s already the case that we have models that are tested and then executed automatically, so I don’t see it as a structural change for us.

“It doesn’t mean that I don’t want us to be at the forefront – quite the contrary. It’s more a confidence that this is part and parcel of how we operate already.”

It is a confidence that extends to the firm’s performance as a whole – and with apparently good reason, given its financials. But across the whole piece, what could go wrong?

“We are constant worriers – that is our gig,” says Desmyter. “After all, a lot of our strategies are run for diversifying and tail-hedging mandates.”

The firm recently had an executive committee offsite at which it thought through some of its concerns. Interestingly, regulation – which Desmyter acknowledges would have been one of his top picks at any point in the last 10 years or so – is not among his biggest concerns right now.

Away from the obvious constant of market risk, he returns to the theme of counterparty risk and the fact that there are fewer bank counterparties for a firm like Man now than at any point since the maturity of the financial markets.

Desmyter says he feels confident in the group’s investment in innovation, which he thinks gives it a good position in the always intense competition for assets. But he acknowledges that advantages can swiftly vanish if other things are neglected.

“The biggest thing that we worry about is not jeopardising things that are working well, which includes culture,” he says. “It is easy to embrace the latest fad and mess up decades of building a business – you can lose it much more quickly than you built it.”