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Jith Eswarappa

GLG AT A GLANCE

P/E ► -1.92   EV/EBITDA ► -3.50   ROA ► -80.9% AVG ROE ► -1420.5% AVG Debt to Equity ► -2.71   Current Ratio ► 1.70 AVG Interest Coverage Ratio ► -22.3 AVG

 

 

 

 

 

 

GLG Partners, Inc. (NYSE:GLG) is a large alternative asset management firm based in London. It has approximately $24.6 billion in Assets under management (AUM) as of March 31, 2008. GLG Partners takes a multi-strategy approach, managing 40 funds with a broad mix of strategies including equity, Global Macro, Emerging Markets, convertible and credit strategies. GLG has grown its AUM rapidly, from $3.8 billion as of December 31, 2002, giving it a compound annual growth rate (CAGR) of 42%.^[1] GLG comprises a mix of 40 alternative strategy funds and long-only funds, making it somewhat unusual among hedge fund managers, who rarely invest purely in long positions, instead using short-selling and other strategies to hedge their returns and reduce their correlation to the broader market. As with all hedge funds, GLG Partners Inc. charges management and performance fees that comprise the majority of its revenues. Its management fees for external investors range from .75% in its long-only funds to 2.5% for its alternative strategy funds, and its performance fees range from 5% for some of its [fund of hedge funds]] to 30% for some of its alternative strategy funds.^[2] The performance fees are subject to a high-water mark that prevents GLG from charging the fees unless the fund is above its previous greatest value.

As with other hedge funds, GLG’s goal is to produce high absolute returns with low volatility and correlation the equity and fixed-income markets. While it does not release volatility figures, GLG has achieved compound net annual return of 17.1% in its alternative strategy funds and 15% in its long-only funds since their first fund's inception in 1997.^[3] However, it has faced investor redemptions lately, owing to the departure of star manager Greg Coffey, who managed approximately $7 billion of GLG’s assets. Even though GLG has hired replacements to helm the funds that Coffey ran, GLG has admitted that it could lose as much as $5 billion of those funds under Coffey’s management, as he is leaving to set up his own hedge fund. This illustrates the risk of “Key Man Syndrome” faced by many hedge funds.^[4] Moreover, with returns of 50% last year, Coffey generated 60% of GLG’s performance fees last year, which make up the lion’s share of its revenues.

Overview

GLG Partners was formed in September 1995 as a division of Lehman Brothers International and began offering funds two years later, in early 1997, giving it an 11-year track record that is attractive to clients. It split off from Lehman in 2000, and went public as a corporation, not a partnership, in early November 2007. As a result of its international origin, very few of its clients are from the United States, and they represent less than 5% of its AUM. Given that the United States is the source of 57% of the hedge fund industry's AUM, this makes GLG very underrepresented in the United States.^[5] GLG’s Principals and other management and employees collectively own 65% of the voting equity in the country, and many are heavily invested in the various GLG funds as well.^[6] GLG Partners consists of a wide array of funds that can be broken down into a few classes.

GLG Funds Breakdown

GLG Partners consists of a wide array of funds that can be broken down into a few classes:

Single-manager alternative strategy funds: These are GLG’s core offering, with 21 funds managing $18.8 billion, or 65% of its Assets under management (AUM). These funds use a wide array of strategies across various asset classes, such as equity and multi-asset long-short, various arbitrage strategies, convertible bond funds, and long-short credit funds. These funds can also use leverage, short positions, and derivatives strategies.^[7]

‘’Long-only funds’’: These funds pursue non-hedged equity market strategies and focus on particular regions and sectors. The 13 long-only funds manage $4.8 billion, or 16% of total AUM.^[8]

Funds of GLG funds: These three funds, representing 8% of GLG’s assets under management, invest in other GLG funds, giving limited partners access to several of GLG’s strategies.^[9]

Multi-manager funds: These five funds represent only 2% of GLG’s assets under management, and are fairly standard funds of hedge funds.^[10]

Managed accounts: GLG uses these accounts to cater to large institutional customers who want a customized approach to investing in the various GLG funds. It has 17 such clients who comprise 8% of total assets.^[11]

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Business Financials

GLG Partners reported a net loss in 2007 as a result of compensation expenses related to the IPO, but was profitable from 2003-2006. As with most hedge funds, the majority of its revenue comes from Performance Fees. This dependence could hurt it greatly, as 60% of its revenues depended on one trader who is leaving the firm in October 2008. Moreover, the existence of a high-water mark also makes dependence on performance fees risky, as a decline in the value of a fund would prevent the firm from receiving the performance fees. Until 2005, GLG Partners earned a substantial percentage of its revenue from transaction charges levied upon its clients. After phasing those out in 2005, GLG then instituted administrative fees that are a much smaller percentage of its revenues.

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Trends and Forces

As the hedge fund industry becomes more institutionalized, capital flows to the larger funds to the detriment of smaller, newer funds.

The hedge fund universe has grown very rapidly, and now numbers nearly 10000 managers, making it harder for funds to produce non-correlated returns. Moreover, institutional investors, such as pension funds, seek out managers with experienced track records and large funds.^[16] For instance, another Great Britain-based fund, Ashmore Group, reported on July 16, 2008 that its Assets under management (AUM) rose by 19% over the last year to $37.5 billion, a growth rate substantially slower than GLGL's 45% compound annual growth rate(CAGR).^[17] GLG Partners, with over $24 billion in Assets under management (AUM), is a beneficiary of this trend. In addition to having a large number of funds that allow for diversification within the firm, GLG also offers managed accounts targeted at institutional investors. Furthermore, many of their funds have historically low correlations with the broader market, with the exception of their long-only funds, which are designed to provide full, unhedged exposure to the market. The correlation of GLG's funds to the relevant index, such as the S&P 500 or the MSCI World Index range from .08 for their equity long-short funds to .86 for their equity long-only funds.^[18]

The credit crisis and election year have stepped up the push towards increased regulation and taxation of hedge funds.

GLG Partners has one big advantage in that it is already registered as a corporation, not a partnership. While this means that it pays higher taxes than most hedge funds, it also means that investors do not need to manage the tax consequences of holding its stock, while the shareholders of other publicly traded hedge funds could face Unrelated Business Taxable Income (UBTI) taxes and various filing restrictions as a result of owning part of a partnership.^[19] However, many of the other regulations spurred by the market downturn and the credit crisis could impact it as well. The Financial Services Authority, the market regular in Great Britain, GLG's headquarters, has tightened the rules on short-selling the stock of companies in the process of raising capital, while the SEC has issued new regulations preventing naked shorting, the practice of short-selling stock without explicitly borrowing it first.

The turbulent market environment is hurting hedge fund returns.

Many hedge fund managers have lost money in the first half of 2008 as a result of the ongoing turbulence in the market. Given the presence of high-water marks, this depresses the fees earned by the managers. The Children's Investment Fund, or TCI, a major British hedge fund, was down nearly 10% for the first quarter of 2008, leading to hand-wringing by the portfolio manager, Christopher Hohn.^[20] Moreover, eight of the thirteen major hedge fund strategies tracked by the Edhec Alternative Indexes posted negative returns for the first six months of 2008. While the returns were generally only slightly negative, emerging markets were an exception, with India and China-focused funds plunging 37% and 19% for the first half of 2008.^[21] Given that GLG has large emerging-markets funds and is losing its star portfolio manager for that strategy, the deeply negative returns of both those equities markets and the hedge funds that trade in them indicate that GLG will be hurt by Greg Coffey's departure. Moreover, GLG's funds resulted in a -5.1% return for the first quarter of 2008.^[22]

Competition

The hedge fund industry manages around $2.6 trillion^[23] in assets across nearly 10,000 funds, making it an increasingly crowded and competitive field. Within the field, managers fall into very distinct categories on the basis of investment styles and strategies, such as short-bias funds, that focus on short-selling stocks, or global macro funds, which make bets on price movements in the equity, currency, Interest Rates, and commodities markets. Moreover, the majority of the funds are privately held partnerships that provide very little information to the public, making revenue and net income comparisons difficult. Moreover, the investing styles also make comparisons difficult, as some hedge funds are far more volatile than others, or use much more leverage to produce their returns. Of the three publicly traded alternative asset managers, Fortress manages private equity funds, hedge funds, and two real estate management vehicles, making it far less of a pure hedge fund, but still exposing it to markets that have been battered by the credit crisis, such as PE and real estate. Och-Ziff and GLG Partners are somewhat similar in that both are large multi-strategy funds, but GLG has a much larger number of funds than Och-Ziff, which operates all its strategies across four funds.

References

1. ↑ GLG Partners Form 424B3 Prospectus pg. 1 June 12, 2008
2. ↑ GLG Partners Form 10-K FY 2007 pg.56
3. ↑ GLG Partners Form 10-K FY 2007 pg. 9
4. ↑ Times Online: GLG hedge fund braced for $5bn exodus May 7, 2008
5. ↑ GLG Partners Form 10-K FY 2007 pg. 10
6. ↑ GLG Partners Form 10-K FY 2007 pg. 9
7. ↑ GLG Partners Form 10-K FY 2007 pg. 10
8. ↑ GLG Partners Form 10-K FY 2007 pg. 11
9. ↑ GLG Partners Form 10-K FY 2007 pg. 11
10. ↑ GLG Partners Form 10-K FY 2007 pg. 11
11. ↑ GLG Partners Form 10-K FY 2007 pg. 11
12. ↑ GLG Partners Form 10-K FY 2007 pg. 6
13. ↑ GLG Partners Form 10-K FY 2007 pg. 6
14. ↑ GLG Partners Form 10-K FY 2007 pg. 49
15. ↑ GLG Partners Form 10-K FY 2007 pg. 49
16. ↑ WSJ: Losing-their-edge funds July 2, 2008
17. ↑ Bloomberg: Ashmore Group Surges as Assets Under Management Climb July 17, 2008
18. ↑ GLG Partners Form 10-K FY 2007 pg. 6
19. ↑ Partnership Tax Issues of Offshore Hedge Funds
20. ↑ Emails Show TCI's Hohn Grappling With Bad Bets
21. ↑ Hedge funds' losses less important than outperformance of other asset classes, says HFN
22. ↑ GLG Partners, Inc. Credit Suisse Financials 1x1 Conference May 15, 2008 pg. 5
23. ↑ DealScape: Hedge Funds Top 2.6T Under Management April 17, 2008
24. ↑ Och-Ziff 2007 Form 10-K pg. 49
25. ↑ Och-Ziff 2007 Form 10-K pg. 49
26. ↑ Och-Ziff Capital Management Form 8-K July 02, 2008 pg. 4
27. ↑ Och-Ziff 2007 Form 10-K pg. 12
28. ↑ Fortress Investment Group 2007 Form 10-K pg. 34
29. ↑ Fortress Investment Group 2007 Form 10-K pg. 34
30. ↑ Fortress Investment Group Annual Report 2007 pg. 2
31. ↑ Fortress Investment Group Annual Report 2007 pg. 10
32. ↑ GLG Partners 2007 Form 10-K pg. 48
33. ↑ GLG Partners 2007 Form 10-K pg. 48
34. ↑ GLG Partners 2007 Form 10-K pg. 49
35. ↑ GLG Partners 2007 Form 10-K pg. 48