The Southern California region is known to be one of several hotbeds for alternative investing thought. That reputation might have been cemented just a little further when PIMCO, formerly the world’s leading bond fund manager, lured Emmanuel “Manny” Roman away from his perch as CEO at London-based Man Group. The move installing Roman to CEO is significant from several standpoints, including the PIMCO trend towards strategy diversification, which ValueWalk first discussed on January 21, 2014 and later addressed in more detail. A seed was sprouting at PIMCO about the same time a dichotomous trend towards strategy diversification was taking place at Man Group. The historic managed futures strategy leader, spawning some of the industry’s greatest names, was at this time diversifying from CTA space amid then quantitatively challenged market environments that lacked cyclical adjustments and price persistence.
From rough and tumble commodity trading, Man Group has been on a quest for strategy diversification
Roman, 52, replaces Douglas Hodge at PIMCO, a firm that lost its title of “World’s largest bond fund” in May of 2015 to Vanguard.
There are meaningful comparisons to be made between the path PIMCO has taken and that of MAN Group – as both have attempted to diversify their product mix. PIMCO has been moving towards a mathematically driven approach, initially nesting a managed futures division amid its product offerings, while Man Group has been diversifying in the opposite direction. Man Group, the world’s largest listed hedge fund, went on its own quest for strategy diversification when Roman become its CEO.
Man Group was founded by James Man in 1783 and, like many in the commodities business, the firm has a colorful history. The commodities trading firm, now housed in respectable Riverbank House in London, initially supplied rum to the British Navy, a profit center that lasted for nearly a century. The firm entered commodity trading early in the industry's history, executing trading tactics among the docks of London before such trading took place on physical exchanges. Man excelled at brokerage but an intellectual, mathematical side of the business, the asset management group, was also leading an industry forward its brightest stars.
Man’s lead momentum-based AHL product line, for instance, is representative of some of the top minds in the business, including Sir David Harding, who represents the "H" in AHL. He, like the other company namesakes, left the firm to start their own momentum-based funds. Harding started Winton Capital Management, whose $12.6 billion Futures Fund was a hero during the 2008 market crash. Recently, however, the fund, up just 0.56% year to date, is not keeping pace with peers who have more nimble assets under management. HSBC's Managed Futures Systematic Global performance average, for instance, is up 5.07% year to date, driven in part by exposure to niche markets such as German interest rate products and lightly traded agricultural exposure.
Ultimately Man Group's fund management and brokerage business split amid what was known to be considerable acrimony, with fees and commissions being charged from MF Global to Man Group said to be a point of heated discussions.
They separated in what appeared to be a nasty divorce. MF Global was the resultant brokerage firm and it collapsed in 2011 in what can be described as one of the industry's most historic moments. Man Group, for its part, went on to become the world’s largest publicly traded hedge fund company.
Shortly after MF Global’s demise, Man Group set about a calculated strategy to diversify from its historic roots in momentum-based investing. In bringing aboard Roman and embracing GLG, Man Group signaled a shift to a balanced product set that included equity-driven products. What many inside the CTA industry appreciated at the time was GLG, while equity-based, embraced strategy diversification. The firm maintained a quantitative, mathematical focus but just took the managed futures CTA mindset to a new level. The firm did not eschew core managed futures CTA strategies. But in 2012 - 2013 when decisions were made and execution strategies were in place, the majority of managed futures strategies were floundering in the face of wide-spread central bank quantitative stimulus that dulled volatility and price persistence. Even divergence and reverence to a mean was finding difficulty in oddly correlated markets. Man Group was being publicly accused of "backing the wrong horse."
These mostly long-only denizens of the street who were throwing stones didn't apparently understand a key point of technical market structure. Market environments have tended to be cyclical. This was math and statistics used to understand market structure and general price patterns, not uncover a formula to find the next big stock pick. Those in the commodities and derivatives industry learned much about cyclicality from agricultural markets, but they also existed in economic cycles as well. Changing market environments lead to different strategy win size.
Fast forward to 2016 and it is the momentum-based investing strategy that is holding up Man Group business. In a world of negative interest rates and QE being blasted about amid already reasonably good economic growth, institutional investors are logically thinking about hedging. During rocky times managed futures has delivered when price persistence has followed volatility. The best programs have high win percentages during periods of beta upside deviation, but can manage risk well during negative beta market environments.
Based on performance reporting documentation reviewed by ValueWalk, Man Group has varying strategy performance relative to beta market environments. Man Group’s $1.5 billion AHL Evolution managed futures program is up 6.69% year to date, beating industry average. The large $4.5 billion AHL Alpha is up 2.19% and the AHL Diversified is up 1.67%. The lightly subscribed $33 million AHL Currency Fund DN USD, however, is down -15.44% year to date.
PIMCO Is Diversifying Strategy In Favor of Quantitative Alternatives
Contrast Man’s history with that of PIMCO and see the same logical overall goal – diversification of strategy. But instead of moving away from managed futures strategies and other quant approaches with a documented history of delivering “crisis alpha,” PIMCO is embracing a quantitative approach – a legacy brought forward by former PIMCO top executive and founder Bill Gross.
After a historic twenty-year bull run in bonds, Gross wanted to diversify the firm’s strategy mix, a move that was at odds with Mohamad El-Erian, leading to a well-publicized split between PIMCO’s founder and his heir apparent. On January 21 ValueWalk discussed the alternative asset ideology rift between El-Erian and Gross. The PIMCO quantitative division appeared at the center of a then nascent trend developing. On February 24, ValueWalk provided more reporting on a move that would today manifest itself in a new CEO taking the reins at PIMCO, one with a significant alternative investing background.
The ugliness that proceeded both Gross and El-Erian departing PIMCO might have seemed like an illogical and unproductive argument to Josh Davis. He was the mathematical mind who then led eight-man team out of Newport Beach, California. At the time Davis was said to be among a small but growing voice calling for logical diversification of strategies. With the appointment of Roman as CEO of PIMCO, the quest for diversification grows amid an illogical world of negative interest rates and generally strong economic growth. Against odd volatility patterns comes a common quest for lower overall portfolio volatility. The path PIMCO is taking leads to the same location as Man Group, they just appear to be arriving from different backgrounds.
Luke Ellis, an honors mathematics and economics student with a background at GLG in multi-manager (strategy) integration, will replace Roman as CEO of Man Group September 1.
Man Group and PIMCO did not respond to a request for comment.