Robert Manning got to know Thomas Knott in the 1980s, when both were rookie high-yield-bond analysts at Boston-based MFS Investment Management. Manning stayed put, rising to his current role as president and CEO; Knott left the traditional asset management business, eventually starting K Capital Partners, a value-oriented hedge fund, in 1998. Now the two are back together, this time in a venture that will seed hedge fund managers.
Knott will run Four Pillars Capital, a new subsidiary of $204 billion-in-assets MFS that will offer capital to emerging hedge fund managers, as well as access to its global distribution, compliance, risk management and operational infrastructure. As for likely clients, Manning says: “We’ve seen the recent turmoil in the alternatives market. In contrast, we’ll focus on fundamentally driven strategies that won’t use a lot of leverage.”
MFS is betting that its experience in the highly regulated mutual fund business can help it avoid some of the problems that hedge funds have run into because of their penchant for secrecy on such matters as portfolio holdings.
“We’ll be able to combat some of the problems that have occurred because of a lack of transparency in the alternatives market by overlaying our technology, operations, risk tools and trading platform.”
MFS developed these capabilities as its traditional long-only business expanded into shorting stocks, using derivatives and structured products like collateralized debt obligations.
The firm plans to invest in long/short equity managers, as well as those that trade in distressed debt and event-driven strategies, among others.
MFS, which likes to proclaim that it created the first mutual fund, formed a separate alternatives company because it didn’t want to risk conflicts between its traditional and alternative investment businesses. To emphasize the point, Manning says he is the only MFS employee whose key card is programmed to open the door to Four Pillars’ offices.
Knott adds, “There’s the potential for client conflict: Are the best people going to the hedge fund side? Or are the juiciest trades being allocated to the higher-fee hedge funds?”
