Financial Times

Man Group and AQR try to take aim at private equity industry

by Lindsay Fortado and Robin Wigglesworth, FT

June 14, 2018 | 4:47 pm
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The popularity of private equity investments has prompted asset managers such as Man Group and AQR to devise strategies that aim to replicate PE returns but at a much lower cost to investors.

Both companies are trying to develop strategies that will also allow investors to exit the investments more easily than is the case with PE, and are deploying different quantitative approaches.

The era of near record-low interest rates since the financial crisis has driven a boom in PE, helping persuade investors to lock up their money for an extended period. State Street’s PE index has gained 4.2 per cent this year and is up 75 per cent since 2013.

Man Group, which is headquartered in London and manages about $113bn, in April launched a “liquid private equity” fund in its Numeric division, according to people familiar with the matter.

The fund will not invest in PE, but in publicly listed small and mid-cap US companies with return profiles similar to those found in a typical private equity portfolio. Investors, who will be able to withdraw their money with a week’s notice, will be charged fees comparable to that of an actively managed mutual fund, so 0.5 per cent to 1 per cent. Man Group declined to comment.

AQR, the $225bn asset management group based in Greenwich, Connecticut and led by Clifford Asness, is also in the “very early” stages of exploring whether it can extend its more systematic, quantitative and cheaper approach to investing to the private equity industry.

“There’s a mix of excitement and cynicism,” Mr Asness said in an interview. “We’re not people who think . . . that quant will work everywhere. Private equity is bespoke, the data are very iffy. Then, again, they charge a ton.”

In 2015, Brian Chingono of the University of Chicago’s Booth School and Daniel Rasmussen of Verdad Fund Advisors caused a stir by publishing a paper that argued that the returns of private equity firms could be mimicked simply by making a leveraged bet on smaller company stocks.

Alexander Healy, deputy chief investment officer of AlphaSimplex Group, which specialises in replicating hedge fund strategies, said that its studies indicated that this was indeed true. “The majority of the return and the risk are simply the market risk, but in disguise,” he said.

The effort by Man and AQR raises the question of whether investors actually want exposure to the daily volatility of public markets in their private equity holdings, according to Andrew Beer, the founder of Beachhead Capital, which markets liquid products that seek to deliver hedge fund performance.

“Private funds report only periodically, and mark to market changes can materially lag those of the overall markets,” he said. “This returns smoothing can help allocators to manage investment committees and other constituents, even if the appearance of stability is not reflective of the actual volatility in the underlying investments.”

AQR is still figuring out the best way to attack the field, including tapping into the “secondary” market where institutional investors buy and sell stakes in existing buyout funds.

“If it’s a relatively fair market, you really may be able to build a cast-off secondary market of these things and then charge less. And be more diversified, so if any one fails you’re hurt but you’re not hurt that much,” Mr Asness said. “But I’m making no claims that will work. I’m just saying it’s a really fascinating area to explore . . . There’s a lot of room to charge a third of what they charge and have an interesting product.”

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by Lindsay Fortado and Robin Wigglesworth, FT

June 14, 2018 | 4:47 pm
12893  |   93   |   0  |   Start Conversation

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