John M. Kelly is president and chief executive officer of Man Investments, the asset management division of Man Group PLC, London, the global futures broker and alternative investment manager. Man Investments is best known today as the juggernaut of hedge fund companies with $32 billion under management. But its origin is ancient, relative to many alternative investment managers. Man's predecessor was founded in 1783, when James Man established a sugar brokerage in London, later branching into cocoa and coffee. The company was renamed E D & F Man in 1860 and primarily remained a commodities trader until the 1980s, when the firm moved into futures and options brokerage. An investment management unit was formed in 1983 and the company went public in 1994. The agricultural businesses of E D & F Man were sold in 2000 and the remaining financial services businesses became Man Group.
Man Investments offers more than 200 hedge funds and funds of funds managed by five investment subsidiaries: AHL, Glenwood Capital Management LLC, Man Global Strategies, RMF Investment Management and Westport Private Equity Ltd.
Mr. Kelly has been with Man Group since 1987, when he joined as regional manager, based in Bahrain. He came to Chicago in 2001 to open an office and build the company's presence in the United States.
Mr. Kelly spoke with senior reporter Christine Williamson about the hedge fund industry and the challenges of Man's entry into the U.S.
Q Has Man Investments' growth been organic or through acquisition?
A On the distribution side, in the raising of assets, the growth has been predominantly organic. I think it is true to say that we have a unique global distribution model, in terms of the methodology we use and the scale of it.
There are two areas. On the institutional side of the business, we have specialists to sell to institutions. Of the $32 billion we manage, about half is institutional. A big chunk of that money did come through acquisition when we acquired RMF. The balance came through organic growth.
On the private-client side of the business … we work through distributors — independent financial advisers, asset managers, private banks, regional banks and the private banking arms of large banks. We have about 1,500 individual distribution firms around the world.
Q Are more acquisitions planned?
A We have quite a large team of people based in London, with quite a number in New York, whose task is to find new investment talent for us. Now, in obtaining that investment talent, there are a number of models. We could build it. Or buy it. Buying a manager is relatively rare because if a manager has been working in an organization on the proprietary trading desk, he's not going to want to come and join us. He's not going to want to sell. It would defeat the object (of leaving the big organization). We would be more likely to take a minority stake in a hedge fund manager or we may have a capacity deal — like a strategic alliance where we will be guaranteed some capacity. We often find very early stage managers, perhaps people who have managed money or who just have a good idea, who will move into our organization. They will almost become de facto employees to begin with. They would paper trade to start. Then trade with our money — we always eat our own cooking first. … Then, if these early stage managers are successful, they'll be kicked out of the nest to set up their own businesses.
Q Do you ever keep the managers in-house?
A We would want them to move out. We will give them the facilities (for support), but we will be needing the space (for more new managers). Often, when they've gotten past the seed stage, they want, and we would insist, that they have a robust infrastructure. So they will need to build up staff and typically there isn't space in our offices for that.
Q Do you ever train talent from the ground up on the investment side?
A No. We have a program for outsourcing some "blue sky" research to universities and we have a program for bringing young graduates into different areas, but not to manage other people's money. Usually the candidates for that program have managed money somewhere else or have an idea. They're coming to us with some experience and a proposition.
Q Is the intention to keep Man's client base evenly split between institutional and private clients?
A We think it's very healthy and important to grow both areas. Here in the United States, we have more penetration on the institutional side for historical reasons, through Glenwood. Although we are very new here, Glenwood has a long track record (on that side of the business). In the U.S., the bigger focus in terms of bodies, although I wouldn't say it is the important focus, is the mass affluent market. The reason is two-fold. It's a huge market and for the home of hedge funds, it's quite astonishing to me that the mass affluent market here really had very little access to hedge funds. And there are a lot of countries around the world — and I'm not talking about (emerging markets) or unregulated countries — where the mass affluent market has much better access to hedge funds.
Q Will there be a backlash over the performance and quality of hedge funds?
A I think one of the encouraging things I've observed about the hedge fund industry, is that if you look at the press over the past several years, there was this talk about a bubble, with a lot of people leaving the traditional side of the industry and moving into hedge funds and a lot of money coming into the business. Which is true. But one of the things that gives me anecdotal comfort — this is not research! — is that the industry is not chasing a bubble. Many of these managers coming into a hot market could not make money. They closed their doors because they couldn't make money. And I think that's very encouraging because it means the large institutional investors and the fund of fund businesses that allocate to these managers have been discerning.
Q What impact will hedge fund regulation have?
A I have a high degree of confidence that the (U.S.) government is not going to kill the industry. I just can't see that happening. My view — and I think it's shared by colleagues — is that getting through this is going to be good for us. I think we'll end up where some areas are a bit restricted, but I think we'll end up with people being more comfortable with hedge funds. When you look around the world, the bias is toward making hedge funds more accessible rather than less accessible.
Q Do you think that most institutional investors will be invested in hedge funds within 10 years?
A I think there will be significantly greater acceptance of hedge funds and understanding. I think absolutely that there will not be this mysterious creature out there that people either love or hate.It's really polarized now. Now, it's either toxic waste or people absolutely love them. That will go away.