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As a former M&A banker, Man Group CEO Peter Clarke knows the importance of integrating operations thoroughly after a merger. So following Man’s blockbuster purchase of GLG Partners last year — which created the world’s largest hedge fund manager, with more than $69 billion in assets — Clarke was determined to bridge the yawning gap between GLG’s brash entrepreneurial culture, which gives free rein to its star portfolio managers and lets staff dress casually at its office in London’s swank Mayfair district, and the buttoned-down corporate atmosphere at Man, whose core business relies on finely honed computer systems rather than individual personalities and whose City of London office brims with suits.

“One of the biggest cultural questions we faced as a result of the merger with GLG was whether or not jeans should be allowed in our offices,” Clarke says in a recent interview in Man’s boardroom, sporting a well-cut dark gray suit and a crisp white shirt with no tie. So he put the matter to a vote in the management committee, “and now people are allowed to wear jeans in Man’s Sugar Quay building as well as in GLG’s Curzon Street office,” he says. The change has yet to filter down to the shop floor, though. Formal business attire still predominates at Man’s headquarters, while many of GLG’s staff — including principal Pierre Lagrange, whose scruffy goatee and shoulder-length hair make him look more like a rock star than a fund manager — appear to regard jeans as part of their uniform.

The sartorial contrast may seem trivial, but it’s symbolic of deeper differences in style and business practices at the two outfits. Over two decades beginning in the mid-1980s, Man transformed itself from a commodities trading firm into the world’s largest hedge fund manager by acquiring managed-futures traders and fund-of-funds operations and then selling their products aggressively through a high-powered marketing network, mostly to retail clients in Europe and Asia. Its main unit, $23.6 billion-in-assets AHL, is a virtual black box, relying on quantitative formulas refined by armies of Ph.D.s to follow — and profit from — price trends in everything from currencies and commodities to stocks and bonds. In an industry defined by larger-than-life personalities such as Steven Cohen, John Paulson and George Soros, Man is an anomaly. Cognoscenti in the City and on Wall Street would be hard-pressed to identify a single one of its fund managers. The names that come to mind — Clarke and his predecessor Stanley Fink — are both lawyers by training.

GLG, on the other hand, is a hedge fund manager’s hedge fund. Founded by a trio of former Goldman Sachs Group private client bankers, the firm fostered a star culture by attracting elite proprietary traders from leading investment banks and giving them the freedom to follow their own strategies. The formula was both wildly successful — institutional investors enamored of GLG’s trading gurus have swelled the firm’s assets to more than $30 billion — and inherently unstable: The departure of one star trader, Greg Coffey, three years ago triggered outflows of several billion dollars.

Rather than try to meld these differences, Clarke hopes to exploit them. A lack of internal investment management expertise was inhibiting Man’s growth potential, he contends. “It was increasingly apparent that clients, especially those in Asia, wanted direct exposure to a discretionary single manager,” he says. Clarke plans to feed that appetite by marketing GLG’s suite of funds through Man’s distribution network. He is also teaming Man’s quants with GLG managers to come up with an array of new products designed to appeal to institutional investors. He believes that combining the very different business models of Man and GLG will jump-start growth — that, in effect, one plus one will equal more than two.

Actually, Clarke has a far bigger number in mind. He is confident that the newly fortified Man Group can become not only the world’s first $100 billion hedge fund but the first to surpass $200 billion. Not that he comes out and says it directly, but it’s implicit in his outlook. “I anticipate the hedge fund industry in five to ten years will be three to five times the size it is now, and I expect Man to grow commensurately,” he tells Institutional Investor.

Is the investment world ready for a $200 billion Man? Industry executives and analysts have their doubts. Many funds have found it hard to maintain good returns as their size has grown large relative to the markets in which they invest. When James Simons launched Renaissance Technologies’ Institutional Equities Fund in 2005, for example, he boasted that the strategy could theoretically manage $100 billion and still beat the market handily. Actual performance has lagged, though, and the fund currently has slightly more than $4.6 billion in assets.

“It’s very difficult to look that far ahead, but those are very optimistic figures,” one prominent London hedge fund manager says of Clarke’s forecast. “It’s not the sort of thing I would say if I planned to be around in five or ten years’ time.”  That view is shared by Alexandre Pigault, head of research at hedge fund consulting firm Allenbridge Group.“It’s very difficult to forecast where the industry will be in five to ten years’ time, but three to five times growth is very optimistic,” he says.

Some are less skeptical. Clarke’s projection is “a little aggressive but not far-fetched,” says Mark Yusko, CEO of Morgan Creek Capital Management, a Chapel Hill, North Carolina–based investment manager and adviser. “While $100 billion sounds like a huge amount of money, relative to the size of global financial markets at $50 trillion-plus it is not that significant. There are plenty of great firms that can generate alpha, and we do believe that a firm of that size could achieve solid returns.”

When asked about the potential impact of size on returns, Clarke insists he isn’t fixated on the sheer volume of assets alone. “Our focus is on providing superior risk-adjusted returns, and if we continue to do that, we should be capable of growing commensurately with the market. We’re not chasing volume for its own sake. We are very concerned to protect existing investors’ return expectations through careful use of leverage and recognizing capacity constraints in some underlying strategies.”

Lagrange offers a somewhat tempered assessment of the new company’s growth potential. He contends that GLG faces few expansion constraints because it is a collection of 40 relatively small funds that are closed when they reach capacity. The firm recently closed its Alpha Select strategy, which is managed by John White and invests in U.K. equities, when it reached $550 million. Lagrange believes GLG’s managers could boost assets by two thirds, to at least $50 billion, in the next few years under Man’s parentage. “There is a massive opportunity here to create the best of breed,” he says.

Clarke and Lagrange have yet to prove they can deliver on that vision. The enlarged Man Group attracted just $100 million of new money into alternatives in the fourth quarter of 2010 — the first quarter after the merger — while losing a $1 billion long-only mandate from an undisclosed sovereign wealth fund shifting out of European equities.

The lack of overlap between the two firms means they haven’t had any client defections so far, although some customers are keeping a close eye on the group. “We chose Man on its own strengths, and we’ve been very impressed with the service levels so far,” says Emily Porter-Lynch, manager for absolute-return strategies at the U.K.’s Universities Superannuation Scheme, which awarded Man a $1 billion managed-account mandate in early 2010. But, she adds, “mergers can bring about management changes, so we’re monitoring events closely, as we don’t want the service to be affected.”

Clarke also runs the risk that his new partners could soon depart, taking much of the value of the acquisition with them. GLG’s senior managers have quit large institutions twice in search of greater autonomy: They left Goldman in 1995 to set up their hedge fund business under the parentage of Lehman Brothers Holdings, broke away from Lehman in 2004 and in 2007 floated the firm on the New York Stock Exchange.

GLG’s three principals — Lagrange, who manages $2 billion as head of European strategies; New York–based Noam Gottesman, who heads up the U.S. business and manages a $700 million global opportunities strategy; and Emmanuel Roman, the London-based co-CEO who now serves as COO of the enlarged Man Group — owned close to half of GLG and received a total of $700 million in Man shares in the $1.6 billion takeover; they can’t sell the shares for three years. The three insist they are fully committed to making the deal work. “Even when the lockups expire, I expect to still be here,” says Lagrange. “I love what I do. I have just compiled a 10 percent net return in the European long-short fund over the last ten years, and my goal is to improve on that over the next ten years.” Gottesman says he’s enjoying the increased freedom to focus on managing money, which was one of the main attractions of the deal for GLG’s fund managers. “I’m very happy doing what I’m doing, driving performance and being less involved in day-to-day management,” he says.

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Related Topics: Man Group· GLG Partners· hedge funds· managed futures· Peter Clarke· Pierre Lagrange