Man Group CEO Luke Ellis discusses systematic-discretionary dynamic, macro challenges, and ESG rise in deep-dive webinar

London

Investment managers “have to be able to cope” with prevailing market environments, and not blame central bank policies for fund performance, according to Man Group CEO Luke Ellis, who says investors also now want more from their portfolios than passive index strategies can deliver.

In the latest of Man Group’s ‘CIO Agenda’ webinar series, Ellis and chief investment officer Sandy Rattray explored the dynamics between systematic and discretionary hedge funds, the rise of passive investing, the challenges faced by macro strategies, and the development of ESG, among other things.

Systematic and discretionary fund strategies – both of which form a major part of the London-based, publicly-traded hedge fund giant’s product offering – are fundamentally alike, Ellis said. At their core, they aim to consume information in order to determine whether a security is cheap or expensive.

“The great thing about quant processes is they can consume an incredibly wide amount of information around a lot of different instruments,” Ellis said. “Humans are generally much better at very concentrated strategies because we’re not good at lots of different ideas.”

He added: “I think the world will get more quant – we clearly have a bet on that as a firm.”

The discussion also weighed up how indexing has put pressures on active discretionary fund management.  Ellis acknowledged the growth of passive investing as healthy for markets, but said end-clients ultimately want more from their portfolios than the returns offered by passive products.

Too many managers in the past have tried to run active quant or discretionary strategies and ultimately failed to add value for investors, though recent years have seen a “winnowing out” of such firms. “That’s where active management comes in,” he added.

Rattray meanwhile flagged up the disappointing performance of macro hedge funds, an area where Ellis remains a sceptic.

Ellis suggested that macro investing is often built around a small number of ideas interlinked by monetary and fiscal policies and gleaned from freely available information, which can end up dominating a portfolio and make it tough for managers to develop an edge.

“I have a lot of good friends who run macro hedge funds… there are some very good returns in macro funds,” he said. “But the very strong returns were very concentrated in one quarter. One good quarter out of ten years of investment is quite hard for most clients to put up with.”

He added: “The really big returns in the second quarter of this year were made by people who are mostly just running their own money now so they can run a very high level of risk.”

Elsewhere, he suggested that blaming central bank-dominated markets, characterised by low-to-negative interest rates, for an investment strategy’s returns can be “a bit of an excuse” (“We have to be able to cope with what’s going on”).

The webinar also tracked the development of ESG from being “a weird thing on the side, to a nice-to-have, to a must-have”, and Ellis explained how the areas of focus between environment, social and governance varies across clients.

“It is now pervasive, and I think that is a good thing,” he said, acknowledging the differing ways that ESG metrics are used by funds “We’re in the second phase now where there is messy data, but there is a possibility to deliver science. One of our skills is dealing with messy data and extracting value out of that. And so we think there's an ability to add value now.”