Stanley Fink, who oversaw a 10-fold increase in Man Group Plc (EMG)’s assets under management during his seven years as chief executive officer, is finding it harder to keep investors at his latest hedge-fund firm.
Losses and client redemptions have reduced assets at International Standard Asset Management Ltd.’s main hedge fund by almost half over the past 18 months to $585 million, Fink, the firm’s CEO, said in an interview yesterday. London-based ISAM has responded by changing some of its management, examining why the fund hasn’t performed as well as expected and increasing the number of markets it invests in, he said.
“It’s a bit like when you lose a few races in Formula 1,” said Fink, 56. “You realize your car wasn’t as fast as you thought so you go back and re-engineer every part. The system is now very leading edge.”
The ISAM Systematic fund fell 14 percent in the nine months through September, after declining 17 percent in 2012 and 2.7 percent in 2011, hurt by a lack of the market trends that the firm relies on to make money, according to a letter sent to investors this month obtained by Bloomberg News. Since the end of 2010, the fund has declined 31 percent, more than three times the 9.7 percent fall in the Newedge CTA Index, which tracks the performance of hedge funds that use computer algorithms to profit from trends in asset prices.
Fink says the losses haven’t deterred him from a goal of building ISAM into a firm managing as much as $5 billion, which he set after taking the reins five years ago.
“The business is profitable,” he said. “We business-planned for drawdowns, which are, sadly, part of the business. In a period when performance is not good, there will not be significant bonuses. Staff are grown-up enough to know that.”
House of Lords
Fink, who sits in the U.K. House of Lords, is also the former co-treasurer of the country’s jointly ruling Conservatives and has contributed at least 3.7 million pounds ($6 million) to the political party since 2003, according to campaign finance disclosures. The U.K. Sunday Times estimates he has a personal fortune of 130 million pounds.
Fink joined ISAM in 2008 after stepping down a year earlier from Man Group, the world’s biggest publicly traded hedge-fund manager, which oversees $52 billion. In February 2010, he teamed up with Larry Hite, who had been running an earlier version of what became the ISAM Systematic fund out of his family office. Hite’s experience buying and selling assets based on signals from computer models goes back to 1981, when he started Mint Investment Management Co., according to ISAM’s website.
ISAM had about $200 million of money from outside clients when it started trading Hite’s investment system in May 2010.
As ISAM grew, the firm hired staff away from London-based Man Group, including Alexander Lowe, the company’s former head of product development, and Darren Upton, who oversaw a group of researchers focused on developing trading models at its flagship $14 billion AHL Diversified hedge fund. ISAM appointed Upton chief investment officer this month, replacing Alex Greyserman, who was named the firm’s chief scientist.
ISAM’s biggest losses in 2013 have come from trading bonds, which slumped starting in May after U.S. Federal Reserve Chairman Ben S. Bernanke began signaling that the central bank may scale back its asset purchases as the economy improves.
Greyserman said the fund has underperformed because it targets as much as 50 percent more volatility than competitors, it trades more commodities and it doesn’t invest in “non-trend strategies,” according to a January client letter posted on the company’s website.
“The decision to remain pure to the trend-following mantra has recently proved costly,” Greyserman wrote. “We must accept that we can experience underperformance during periods of choppy, directionless markets.”
Trend-following funds have been hurt over the past three years as market sentiment swings from pessimistic to optimistic based on statements from politicians and perceptions of Europe’s ability to resolve its sovereign debt crisis. Man Group’s AHL has posted investment losses of 16 percent since 2010 and the fund’s assets have fallen by $9 billion.
“People say to me ‘Isn’t trend-following dead?’” Fink said. “I probably remember four or five occasions in my experience in the fund-management world when people have said that. In each case, it’s been absolutely wrong, and the industry tends to roar back when most people have capitulated.”
ISAM, which has 30 employees and manages about $635 million, has addressed its losses by increasing the number of futures markets the systematic fund trades to 85 from 50 at the beginning of last year and revising the length of time investments are held.
The fund has also looked to expand its foreign-exchange trades beyond bets on how currencies will move against the U.S. dollar, Fink said. ISAM should benefit over the long term from being smaller than competitors like AHL, because it can invest in more markets and ones that are less liquid, he said.
Man Group’s stock price surged more than fourfold during his tenure as CEO, prompting the Financial Times, the Independent and other newspapers to label Fink the “godfather” of the U.K.’s hedge-fund industry. When he stepped down, the company oversaw $61.7 billion. Man Group bought a stake in Hite’s Mint Investment in 1984, starting its transformation from a 200-year-old sugar broker into a hedge-fund firm.
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