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Not many people in the hedge fund industry can remember – let alone were instrumental in – the creation of Europe's first managed futures fund. David Anderson, now chairman of Insch Capital Management, has been one of the leaders in the creation of the hedge fund industry in Europe since the mid-1970s.
Not only was he one of the first to see the potential of derivatives and futures for investment management purposes, he is widely credited with turning the Man Group into Europe's largest asset manager. His first acquisition for Man was AHL.
Anderson has had a long and distinguished career in financial management. In the early 1970s he started one of the first independent, privately owned futures brokers in London and was crucial in developing innovative methods for investing in futures and options.
He served as vice-chairman of the London Commodity Exchange and as a council member of the Association of Futures Brokers and Dealers, which became the Securities and Futures Association (SFA) and was subsequently merged into the Financial Services Authority (FSA), now the Financial Conduct Authority (FCA).
In addition he was a member of the Securities Institute and director of the Securities and Investments Board (SIB), the first regulatory authority in the UK encompassing everything to do with finance. Before this there had been around 13 self-regulatory organisations, one for each financial area such as commodity futures, life insurance, financial advice and others.
In the run-up to the introduction of the Financial Services Act of 1986, he played an instrumental role.
"SIB was the big thing. When the act was created, everyone wondered what SIB would do and how," remembers Anderson. As a representative of the commodity markets on the SIB, he was "doing battle" with the-then Bank of England governor and treasury secretary. "All the great and good were there to create a new structure. No one understood futures or commodities. They didn't know the difference between physical shipments and forwards and futures contracts. They just lumped it all in with commodities. We had to start from scratch." To help them understand this new world, he took government ministers and officials from SIB around the commodity exchange to sit on a dealing desk so they could learn about the world of derivatives.
When the act came into effect it separated future brokers and other activities. That was the beginning of modern-day Man Group.
"We had anticipated that there would be a sort of conflict of interest. The company notionally separated futures broking and other activities. Along with futures and options came our fund management business, called Mint [Man International]," explains Anderson.
"Everyone involved in finance had to be authorised or become a member of one of the self-regulating bodies the SIB oversaw. ED&F Man remained separate for physical trading and shipping, but Man International was regulated by the SIB," he adds.
Mint went on to become the first managed futures fund to reach $1 billion in assets under management. Man Group, as started by Anderson, is now the largest hedge fund business in Europe, but still has AHL as one of its flagship products at the head of the quantitative side of the business.
According to Anderson, much and nothing has changed in the intervening years. In the early days of derivatives, he and others struggled with uncomprehending governments. "Harold Wilson's Labour government wanted to take the City apart," says Anderson. They and others saw the world of futures as a gambling casino. "Those were [Wilson's] words and they stick in my mind forever. Labour believed the City was a big casino."
A business in three parts
Now he sees the investment business has expanded and moved more to centre stage. For him, however, investment management consists of three businesses and if these areas are well run, success should follow. First, the business needs technical, quantitative investment management techniques and trading specialists "brilliant at what he/she does but couldn't sell anything to anyone and not good at running things".
Next is the packaging of that product and marketing it. The third area is managing a business. "This is how we originally structured Man."
He believes there is a time and place to bring out the investment manager or "quants" but it depends on the audience and it is a delicate mix. "If you sit down and get a hard time from compliance operations of a pension fund, you want your lawyer there or salesman, but you don't want a quantitative genius," he says.
Today he believes hedge funds should be striving for one objective – absolute returns, whatever the strategy. "How are pension plans to fund future liabilities if they don't seek out managers with absolute return techniques? But that's difficult. How do you select the sheep from the goats?" notes Anderson. He also questions why absolute return strategies are not considered mainstream investment management rather than "alternatives".
His advice to the hedge fund industry overall is to talk in a more coherent academic manner to the main investment management industry so that they can understand what absolute return is and why using hedge funds is a good option.
The week on Risk.net, July 7-13, 2018Receive this by email