BOSTON London-based Man Group Plc's (EMG.L) math does not add up -- at least when it comes to expanding in the rapidly growing U.S. hedge fund market, where it has been trying to establish itself for years.
By merging with GLG Partners Inc GLG.N, another London-based hedge fund, Man may be moving to shore up its dominance in the European hedge fund market. But the deal with GLG is not likely to do much to improve Man's failed efforts to become a big player in the United States, industry consultants, investors and lawyers said.
"We just wanted something that would facilitate our access into North America," Man Group Chief Executive Peter Clarke said as part of his rationale for the blockbuster deal.
The numbers suggest the new firm -- boasting $63 billion in assets -- can offer clients anything they want, from actively traded hedge funds to Man's flagship AHL Diversified Plc portfolio, where computers pick securities. Its size alone will make it one of the industry's most sought after fund firms, alongside JP Morgan Chase, Bridgewater Associates and Paulson & Co.
Investment consultants who help pension funds and other large investors pick the alternative investments Man Group and GLG offer are skeptical about whether the new firm can make the kind of splash here that Man executives have spent years trying to create, in part because of history.
MARKETING MACHINE IN EUROPE
The consultants worry that GLG, like Man, is largely a powerful marketing organization that has successfully attracted a lot of assets, but whose roots are mainly in Europe, not the United States. And they expressed some concern GLG's products -- which suffered heavy losses during the financial crisis -- might be a little too aggressive for many more conservatively oriented U.S. investors.
Add Man's string of acquisitions that have been plagued by problems -- its RMF funds unit bet on Bernard Madoff and its Glenwood unit lost many top employees -- and industry consultants wonder just how this deal will help resolve Man's so-called U.S. problem.
"You are missing out on a lot if you are not in this market," said Daniel Celeghin, a partner at consulting firm Casey Quirk & Associates LLC, which forecasts the U.S. market will be the fastest growing in terms of alternative assets in the next five years. Roughly 40 percent of global hedge fund assets are already invested in the United States.
Man's Clarke acknowledged that each firm is "proportionately under-represented" in North America and said "together we will achieve more than we will achieve independently."
To some industry experts, ranging from investors to lawyers, this sounds a lot like the arguments Man's top executives have been using for years -- ever since they put a firm stake in the ground here by buying Chicago-based fund-of funds manager Capital Investments in 2000.
But the track has been less than sterling.
At Glenwood, Frank Meyer, a hedge fund pioneer who mentored hundreds of managers, including Citadel Investment Group's Kenneth Griffin, retired from the firm. Others followed and the turnover may have contributed to sluggish returns, insiders said.
After finding it tough to raise assets here, Man changed strategy by taking stakes in hedge fund firms, including in 2008 Ore Hill Partners, a New York-based distressed credit firm. But shortly after taking the stake, Ore Hill became engulfed in the worsening credit crisis and began restricting investor exits, a trend that was repeated across the industry.
Man also backed Bayswater Asset Management in San Francisco, which was forced to shut down in 2008 after suffering heavy losses during the credit crisis. Bayswater, which relies on computer models to select securities, relaunched in 2009 after revamping its risk management controls.
And Man has found it tough to gain traction with U.S.-based consultants instrumental in helping pension funds and other large investors select the kind of hedge funds and hedge fund of funds products it offers.
Another problem for the firm might be that Man is publicity shy and declines to break out exactly how much it has in assets here, which dampened the enthusiasm of potential investors.
"Over the last years, the dynamics have changed in the financial industry and many players have become a lot more willing to take our calls and interact with us," said Denise Valentine, who focuses on hedge funds at financial consulting firm Aite Group. "But Man Group really hasn't been too interested in talking."
A handful of other consultants said they do not do a lot of business with Man in the United States, citing a number of reasons ranging from high fees for funds of funds products to a less aggressive sales force.
"We don't really use them," said Steve Roth, director of manager research at Dahab Associates, citing expenses, fees and the use of borrowed money to boost returns, as a reason why he shies away in general from large funds of funds such as those Man offers here.
On the other hand, GLG is considered much more open, with executives appearing at conferences, prompting some consultants to say that might point to a culture change.
As Man tried to expand its footprint in the United States, it relied on a number of top executives -- all European -- to spread the word.
After John Kelly, who spent years at Man in Europe and became the first head of Man Investments, USA, in 2001 retired, the company chose German Uwe Eberle to take over in 2007. He was succeeded in 2009, in part, by Martin Keller, who had overseen the institutional business in Europe.
Now with Peter Clarke at the helm -- he took over three years ago as CEO -- some consultants hope for more stability.
(Reporting by Svea Herbst-Bayliss; editing by Andre Grenon)