Investors seek transparency, liquidity and risk controls

Man Group, an international alternative investment management business, offers a range of funds for top tier institutional clients and high-net-worth individuals. The company has been present in the Middle East for more than two decades.

With the hedge fund industry facing turbulent times, Man has geared up to face the challenge by building an integrated hedge funds business.

"The conversation with clients these days focuses a lot more on transparency, liquidity and risk controls," said Patrick Merville, CEO, Man Investment, Middle East.

"At Man we are planning to increase the managed accounts to 140 because they give you lot more transparency, liquidity and a lot more ability to manage risk properly than before."


Globally, hedge funds had one of their worst years in 2008 with a sharp rise in closures, assets down more than 30 per cent and heavy redemptions. With the economic crisis and then the crisis of confidence following the Bernard Madoff fraud, how is the industry faring now?

I'm glad to see that the consensus is hedge funds were victims in the crisis. The hedge funds industry has changed and for the better. The downturn might have hurt performance in the short term but it has also removed many of the weaker players, not to mention the proprietary trading desks of the now-defunct investment banks, from the market. Investors are seeking higher transparency and accountability and there is an exciting competitive environment for hedge fund players. They are now going to invest heavily in their operational capabilities and place a far greater emphasis on service. This, and heightened regulatory requirements, is likely to benefit scale players and be a strong force for consolidation. Investors can also expect to see a far more disciplined industry.

May saw the value of hedge funds rise by roughly five per cent and net redemptions have been declining since the beginning of the year. Has optimism returned in the industry?

We are now at a key inflection point where hedge funds have proved their resilience and redemptions seem to have bottomed out. Institutions sat on the sidelines during the crisis but are now raising allocations to hedge funds. Pension funds are raising allocations and we expect a positive scenario in the second half with an inflow into the industry.

Is the positive sentiment prevalent in the Middle East too?

We are definitely expecting a rise in volumes. At the end of the day investors have to feel more willing to invest in the markets. The mood is bright in the Middle East. I firmly believe that we in the Middle East will come out of the downturn faster than other markets, for a host of reasons. Generally, the mood is brighter. We are talking to institutions and private investors. They appreciate the value proposition of hedge funds, once again the industry has been stress-tested and has come out ahead.

Are you not facing challenges because of the crisis and the Madoff scandal? How is Man Investments coping with that?

Undoubtedly, Madoff has had an impact on the financial industry as a whole. As a result of the fraud that was committed the conversation with clients these days focuses a lot more on transparency, liquidity and risk controls. At Man Investments our target is to increase the number of managed accounts to 140. We are integrating our businesses.

But Man saw a net outflow of about $2 billion (Dh7.3bn)?

We recorded sales of $14.9bn in the financial year ended March 31, 2009. The outflow was $17bn, therefore the net outflow was $2.1bn at group level. What is important is that we have a strong liquidity position, our management ensured we maintained liquidity. We had about $4.8bn of cash at our disposal including $2.4bn of cash on the balance sheet plus $1.7bn of excess capital that the firm keeps. We did not have to resort to gating and were able to meet client redemptions as they came.

Amid the prevailing uncertainty about the crisis, how positive are you about the performance of hedge funds compared with other asset classes?

I see hedge funds continuing to outperform the traditional money management industry. However, if you expect a major boom market you may get a traditional long only fund outperforming hedge funds, but I think I'd look at hedge funds over an extended period of time rather than six months or one year. We have been looking at hedge funds since 1990 and there has clearly been outperformance compared with the traditional money management business. Looking at hedge funds in periods of crisis, for example the Russian crisis or the internet bubble, there has been clear outperformance. Hedge funds have outperformed and I think they will continue to do so.

Where do you see the best opportunities at a time when a lot of money is waiting on the sidelines?

There is a tremendous amount of cash waiting to be invested. Investors are waiting for trends to emerge and we are now seeing confidence coming back. The worst is behind us, that's my personal assessment. We are no longer talking about major investment banks going out of business or financial institutions going bust. The prospects of money flowing back are better. Clients are engaging us, from that perspective it is looking brighter. Another positive of the crisis is that we have strong investment managers running true businesses. More than 70 per cent of the industry is being run by managers with a billion dollars or more – that figure used to be 54 per cent some years ago. Mid to small managers are suffering, larger managers are gaining market share. It means more opportunities if you are a big player.



PROFILE: Patrick Merville, CEO, Man Investments Middle East

Before joining Man Investments Merville was director at Merrill Lynch in London, where he spent six years, first as an institutional salesman in emerging market equities and then in the hedge funds prime brokerage sales group.

He has also held roles at HSBC in New York, where he was Vice-President, Institutional Sales for Emerging Market Equities, and Credit Agricole, where he was an Associate in the private equity business.

Merville holds a BA in economics from the American University of Beirut and an MBA in finance from Columbia Business School.

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