Man Group CEO on lock-ups and alpha…

CAPM / Alpha Theory 05 Dec 2007

With considerable debate ranging about Ranjan Bhaduri’s “Balls in the Hat” game (see related posting), Peter Clarke, the CEO of behemoth hedge fund manager Man Group apparently told a conference audience today that hedge fund lock-ups will bring institutions more alpha.  This, according to Thomson Investment Management News.

This might surprise players of the balls-in-the-hat game because while lock-ups do bring more returns (ceteris paribus), it’s not likely “alpha”.  Instead, it’s more likley just a fair market compensation for locking yourself up and throwing away they key.

In fact, Clarke didn’t actually say lock-ups “will bring institutions more alpha”.  According to Thomson, he actually said:

“It’s all a case of what the investor wants… longer lock-ups mean investment managers can look for alpha in more places. There’s nothing wrong with that… (for investors) it’s not a bad place to end up.”

We asked balls-in-the-hat-game referee, Morgan Stanley’s Ranjan Bhaduri, about Clarke’s comments.  And here’s what he had to say:

“It is true that if the lock-up is longer than it gives the Hedge Fund manager a wider domain of investments to explore that are less liquid (because a portfolio manager must always be concerned about a liquidity mismatch). There has been some convergence between hedge funds and private equity funds (hedge funds really fill the entire spectrum from mutual funds to private equity funds). However, the higher return might not be true alpha, and might be due to an illiquidity premium (some are failing to even deliver that!). It is in the interest of most hedge fund managers to advocate a longer lock-up and say that it’s a good thing, but the investor must make sure that they are getting properly compensated for that lock-up. There are too many hedge fund managers who are not providing sufficient returns for their lock-up terms.”

Bottom line: lock-ups should give you a better return and then some in order to be worthwhile.

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  1. Bill aka NO DooDahs!
    December 6, 2007 at 5:13 pm

    Longer lock-ups will most likely give *investors* in these funds a better long-term return, even if the behavior of the funds is no different, because the long lock-ups will force many of these investors to ride out drawdowns, instead of selling at the bottom in fear (and looking for someplace with hotter returns to chase).

    Unless, for some reason, you believe that accredited retail investors somehow got a little “box o’ maturity” that keeps them from behaving like their non-accredited, mutual-fund investing cousins.

  2. Autocorrelation Aficionado
    December 8, 2007 at 5:12 pm

    Actually many studies have shown that hedge fund returns tend to be auto-correlated. Meaning good funds tend to do well and continue to do well, whereas a bad fund will tend to continue lower until it closes its doors. So are you telling me that an investor should stay in a losing fund, hoping that it will turn around? I think not.

  3. Shelly Jacobs
    January 3, 2008 at 2:07 pm

    Simply giving the investor a line of credit, at LIBOR+, if he wishes to withdraw should be sufficient. to satisfy both liquidity and lockup desires.

  4. Bill aka NO DooDahs!
    January 24, 2008 at 9:40 am

    @ Autocorrelation Aficionado:

    “In summary, presumably sophisticated hedge fund investors as a group chase past returns and fail to time their investments successfully.”

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