Stanley Fink remains a hot commodity. Although the former deputy chairman and CEO of London-based alternative-investment firm Man Group — the biggest publicly traded fund of hedge funds — made a determined effort to retire this summer, his friends wouldn’t let him. Barraged with job offers from hedge fund firms large and small, Fink, 51, abruptly abandoned his plans to become a full-time philanthropist and threw himself back into the corporate fray just as the financial crisis took a turn for the worse.
In mid-September, Fink resurfaced as the newly minted CEO of London-based International Standard Asset Management, a commodities trading firm that specializes in gold and global macro strategies.
CEO is a familiar title for Fink, who wore it for seven of his 21 years at Man, but the scale of ISAM’s business is a far cry from that of the global operation he left behind. That suits the soft-spoken, avuncular chief executive. Fink, who survived treatment for a brain tumor four years ago, was intrigued by the opportunity to help a small, highly successful firm develop its business strategy, and he wasn’t interested in running another huge company — Man had $67.6 billion in assets under management at the end of the third quarter and a global staff of 1,800 (the firm ran just $4.7 billion when Fink became CEO in 2000). ISAM, with a comparatively paltry $200 million in assets and 17 employees, seemed a perfect match. Founded in 2003 by Roy Sher, a proprietary trader who had worked for Merrill Lynch & Co. and hedge fund outfit GLG Partners, the firm, then called International Standard Cayman Management, initially prospered by trading gold futures. Then, about 18 months ago, Sher and his business partner, Alan Amler, moved to capitalize on dislocations in the global markets by designing a new fund, the International Standard Macro Fund, to trade in the largest futures markets: foreign exchange, equities and commodities.
Although ISAM’s funds have done well — its gold fund has delivered annualized returns of 17 percent over the past five years, for instance, and its macro fund was up 7 percent this year through November — the firm is still largely unknown in the institutional market. This summer, Sher and Amler sought some heavyweight assistance to gain a wider audience and recruited Lord Levy, a former Labour Party fundraiser, as the firm’s chairman. Levy phoned Fink, a close friend, to solicit his opinion of the firm and its partners. Fink gave Levy an enthusiastic review. Not long afterward, Sher and Amler recruited Fink to run the company.
Fink says he couldn’t resist the challenge of flexing his entrepreneurial skills at a moment when the finance industry is in such flux. He is also excited about ISAM’s risk-averse methodology, which reminds him of the approach used by AHL, Man’s commodities trading adviser. ISAM holds familiar promise for Fink, who helped transform AHL from a small division with a few hundred million dollars under management into a $20 billion behemoth (it now runs $25 billion in assets).
ISAM runs highly diversified, tightly controlled strategies. Unlike many of its hedge fund peers, the firm doesn’t leverage the trading instruments it uses, which limits its dependence on investment banks. Best of all, Fink says, ISAM’s use of futures and forward contracts frees up its cash and has helped mitigate the worst of the counterparty risks plaguing the industry. “It means that we don’t require liquidity from a prime broker or the banking market to create structured products,” he explains. “And there is no doubt in my mind that exchange-traded products, which are more liquid and better valued than over-the-counter derivatives, are much safer instruments for our clients.”
ISAM has another advantage: Because it trades managed futures, only a small percentage of its client capital is needed to take positions. About 10 percent of the invested assets in a given fund are put up to meet initial margin requirements; another 10 percent are set aside to help protect the fund against market volatility, and the remainder are placed in interest-bearing accounts. What Fink describes as the inherent flexibility and depth of ISAM’s capital is now spurring the CEO to help the firm develop products that guarantee capital preservation — no mean feat in the current market.
Across the hedge fund industry, investors have understandably been disappointed by their managers’ inability to deliver absolute returns in recent months, to say nothing of their lack of capital preservation. The challenges Fink faces are not inconsiderable, and the hours are still long, but he seems to enjoy his new role. He works three and a half days a week, which leaves him enough daylight to pursue such philanthropic endeavors as chairing the 2009 Lord Mayor’s Appeal, which supports two charities named as beneficiaries by Ian Luder, the lord mayor of the City of London. In a mid-November interview at his offices in Knightsbridge with Alpha London Bureau Chief Loch Adamson, Fink took a step back from his new job to discuss the ills plaguing the hedge fund industry, the potential for new fund structures to emerge and the pleasures of working at a small asset management firm where he knows everyone by name.
Alpha: Will we see a shift in hedge fund strategies in the coming year?
Fink: We will. We are entering unprecedented territory on the global financial scene, and the hedge fund industry is about as Darwinian a model as you will find in asset management. My view is that global macro will make a comeback, and it will be a more diversified form of macro than it was in the past, when George Soros and Julian Robertson dominated. It will also be more risk-averse. When you trade futures markets, you can absolutely control the risks. You can set stop-losses and expect to hit them because these positions are taken in very liquid markets, many of which trade 24 hours a day — unlike the equity markets, which can suddenly open ten points down and you find you’ve missed your target. At ISAM we’ve also eliminated the risk of having to pay for leverage and needing counterparties to provide it, because we simply don’t use it.
How has leverage, and its abrupt retraction, exacerbated problems in the markets?
Managers running strategies dependent on leverage have been forced to liquidate many of their positions. At the same time, managers who relied on investment banks as their prime brokers have had to meet increased margin calls because the banks themselves are being squeezed for liquidity. The combination of those two factors has affected the underlying securities and instruments themselves — and some managers promptly compounded the problem by putting gates on their funds to reduce the speed of redemptions. Those gates have had a knock-on effect, because funds of hedge funds having problems meeting their own redemption requests tend to redeem stakes in their better, more liquid managers, just because they can. Unfortunately, those managers’ strategies are suffering as a consequence — as they’ve been forced to sell — which only drives down prices further.
The hope of reaping uncorrelated returns has proved a mirage for many hedge fund investors. Will everything always correlate in a crisis?
Long-short equity has become such a dominant strategy in the global hedge fund industry that those correlations are very high. When I first got involved in the industry, long-short equity was only about 10 percent of the total invested capital; it’s now about 50 percent, and most of those managers are heavily long-biased. In severe market dislocations even fixed-income managers begin to correlate with equity managers, and so we now have — by my estimate — some 60 to 70 percent of the industry with structurally long beta exposure embedded within their strategies. When I started at Man, we began with the premise that hedge funds should be as close to beta-neutral as possible, and the macro strategies that we’re running at ISAM are as close to zero beta as it is possible to get. But staying close to zero requires vigilance.
Will fee structures change now that investors realize that in many instances they have been paying for beta rather than alpha?
People have long argued that performance fees should only be charged over the risk-free rate, or some other hurdle. The curious thing is, now, although investors may ask for that more strongly than they have in the past, the risk-free rate or nominal interest rate is so low as to make it almost academic. When the interest rate in the U.S. is less than 1 percent, it really does make it almost meaningless. I do expect, however, that managers who have asked for premium fees and long lockup commitments from their clients will find those arrangements much harder to sustain in the future.
Are lockups now likely to shorten?
I hope so. I have always held the view that you want to have happy clients — that is the best thing in the world. If clients are unhappy, the second-best thing in the world is just to let them leave. Keeping clients locked into an investment they no longer want to be in is a recipe for disaster. The only justifiable reason to have a long lockup is if the underlying investments require it — and if you’re in a very illiquid strategy that resembles private equity, you probably do need it. But I don’t think long lockups can be justified simply to protect your own business model, and truthfully, a lot of lockups have been used for that purpose. If you want to discourage investors from trying to redeem assets for a certain period of time, then just be honest about it and charge them a redemption penalty; tell them there is a cost to getting out early.
What have you learned from the crisis?
The moral of the story for me is that markets are healthiest when they have the broadest range of participants. We need investors who have different time horizons, different capital requirements and different regulatory contexts. We need investors who buy assets outright, others who hedge their portfolios and some who consistently short the market. I do think shorting is a healthy thing — but I’m not attacking the ban on short-selling financial institutions because, in exceptional situations, people will panic. I can imagine that there may well have been some behavior that wasn’t entirely proper at the time; I don’t know the facts. What was fascinating from my perspective, though, was that everyone assumed that the banks would bounce back when the short-selling ban came into effect. Although a short-term bounce did occur, all of those financial stocks quickly carried on falling.
