The transcript from this week’s, MiB: Luke Ellis, CEO of Man Group, is below.
You can stream and download our full conversation, including the podcast extras, on iTunes, Spotify, Overcast, Google, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: This week on the podcast, what can I say, Luke Ellis, CEO of the Man Group managing well over $100 billion. They are the world’s largest publicly-traded hedge fund and Luke is a specialist in a number of things, risk management, systematic trading, derivatives, big data. He is about as knowledgeable of the world of math and technology-driven trading as anybody in the world and what a tour de force this conversation was.
I wish I had him for another three hours. I just had so many questions to get to. If you’re at all interested in algorithmic trading, hedge funds, big data, understanding what it’s like to run a large firm and to risk hundreds of billions dollars, well then, what can I say, you’re going to find this conversation absolutely fascinating.
With no further ado, my conversation with Luke Ellis.
VOICEOVER: This is Masters in Business with Barry Ritholtz Bloomberg Radio.
RITHOLTZ: My special guest today is Luke Ellis. He is the CEO of Man Group, which manages about $104 billion. They are the world’s largest listed hedge fund. The firm is known as a pioneer in the application of systematic trading since all the way back in 1987. Luke Ellis, welcome to Bloomberg.
LUKE ELLIS, CEO, MAN GROUP: Barry, it’s a pleasure to be here.
RITHOLTZ: So, let’s go back to the early days of your career. You began at Japanese bank Nomura Holdings in the ’80s. Tell us about that experience. The 1980s in Japan was a pretty wild financial world, wasn’t it?
ELLIS: Yes. Well, look, I have to admit that — so, I knew from an early age that I wanted to work in finance. I sort of — I grew up playing cards when I was very young, sort of, three or four, and then my grandfather taught me to bet on the horses when I was about six. And but to a (inaudible) so on and so forth.
And one day, we’re watching the race and I — it was a three-horse race and all of them had odds which were reasonably tight and I looked at my grandfather and said, hang on, this isn’t fair, none of those are good enough, the bookie’s is going to win, and he looked at me and said, the bookies win on every race. And I said, well, I think I want to be bookie one day. And he said, well, in our family, we call that going to work in the city.
So, I knew I wanted to work in the city and it’s hard for young people listening to think about it properly but when I graduated, there wasn’t the Internet. And so, when you were trying to work out where to go and get a job, there was a career office which had various books about jobs and it only had three jobs listed in the city. That was accounting and I knew I didn’t want to do accounting.
So, I applied to all three and the first one that I got through to the final interview, nicely, they offered me the job. One of the interview questions was why do you want to go and live in Japan. But I just thought it was one of those trick interview questions that was all the rage in the ’80s like sell me this broken pan or stop me jumping out of a window or something.
So, I just made up a story of why I wanted to go and live in Japan. Anyway, they offered me the job and then I discovered it was a Japanese firm and I signed up to four months training program in Japan.
Research was harder in the pre-Internet days. That’s what I’m going to defend myself up. But it wasn’t really in time — that was the height of the Japanese companies par (ph) in financial market. So, Nomura, when I was there in those days, they would want quarter’s earnings. They could have bought Merrill Lynch which at that time was the biggest U.S. broker, Goldman Sachs, you name it, just with one quarter’s earnings. So, it’s a pretty good time to get started in the industry.
RITHOLTZ: To say the very least, I find that Americans don’t fully understand the extent of the Japanese bubble as bad as the dot-coms were in the United States. I think the measure of the 1989 peak in Japan was something like five times the U.S. or seven times the U.S. valuation, is that ballpark?
ELLIS: Yes. That sounds about right. I mean, amazingly, it’s still double where it ever got to since.
ELLIS: And the other way, the stat which was always the — the stat which is in the end the best was that Imperial Palace with its garden, which is sort of built in the middle of Tokyo, it’s right in the Central Tokyo, it’s two or three-acre type of lot and at that time, the value of that land was more than the value of the land in California, I mean, all those lands in California. That’s a point where you know that this is a bubble that when it bursts, it’s going to have really dire consequences.
RITHOLTZ: So, you worked with Blaine Tomlinson who is founder of fund-to-funds finance risk management. You ended up at FMR, what was that like working there?
ELLIS: FMR is Fidelity. I think …
ELLIS: … it was FRM.
ELLIS: So, I was lucky enough to start my career right at the beginning of the derivative business. And so, this was a very early days of swaps. And in fact, in Japan, the word swaps wasn’t legal because of Japanese reason.
So, they had a group called a new product department and basically Blaine used to run that and he got to pick all of the new graduates who started that that had a either some sort of mathematical and numerical background. And luckily, I got picked.
And so, sort of dive in to the swap business in 1985, when nobody can teach you how do it, you have to teach yourself because the rules haven’t been written. So, we had the first IBM computer, it’s called an AT or an XT. But the first personal computer on the floor in Nomura and people used to come around to look at it.
This is sort of, I did my first trade by telex. So, I think most people won’t remember what it is. So, it’s a very different world but you basically have to have a feel for numbers in order to be able to do trade. And for me, that was great because I’m never was the best academic. But I’ve always had a natural affinity with patterns and that was why I like playing cards.
Originally, they got me through degrees and math and economics understanding patterns but it really, really worked when you are having to present value on set of cash flows in your head because that was much quicker than the computer and you could get the deal done before the other person’s computer worked out exactly what the answer was.
RITHOLTZ: So, you went …
ELLIS: So, it was a very, very different world that you’d imagine now.
RITHOLTZ: I certainly could. You end up at JPMorgan where eventually you become global head of equity derivatives trading. What was that experience like?
ELLIS: Well, that was my first build-the-business experience. And so, I went there to do swaps and fairly quickly, maybe it’s a couple of years I’ve been there, they had a problem in their sort of nascent equity derivative business and this was back in the (inaudible) days.
So, sort of JPMorgan wasn’t particularly supposed to be doing anything in equities but we were already a very important swap house, maybe the leading swap house and they wanted to do other derivatives. They started an equity derivative business and it sort of haven’t really worked. And in a very JPMorgan way, I got a phone call while I was on holiday saying, when you get back from holiday, your new job is this.
And then a couple of hours later, somebody called me back and said, sorry, we were supposed to ask if wanted that but it was OK, yes, of course. Take the job? Yes, I didn’t get a choice.
So, when I got to that business, it was — I mean, it was sort of 20 people on it, was losing a bit of money and they had revenues of sort — I think revenues of 10 million or something. And when I left, it was seven or eight years later, we were up to making a billion dollars of profit.
So, it was a huge growth of a business and it was a mixture of doing whatever we could do from a client derivative point of view, at the same time, is effectively running a bid hedge fund embedded in the bank and it was sort of hugely successful business that we built up there. And it was – a lot of it driven by the fact that JPMorgan was trying to grow a cash equity business and growing the cash equity business from nothing is expensive.
And the chief executive at that time had said that we would be able to build the cash equity business without losing any money. And so basically, sort of the job of my team was to make enough money to offset whatever money needed to be invested in the next year of the equity — cash equity business.
Honestly, I had a real blast. I had a fantastic boss (ph) who cared to all of the sort of complicated politics of being in a money center bank away from my shoulders. I didn’t have to worry about any of that. I could just get on with running money.
And we had a very good time. We built a lot of interesting strategies, made some very good returns and grew it. And for me, it was a really exciting growing a business. I got a kick of that. I got a kick of leading the truths, long-term number of lessons along the way.
RITHOLTZ: Quite fascinating. One of the interesting things about the JPMorgan derivative book is it actually held up pretty well in the ’08, ’09 crisis because before that, a good five or seven years earlier, there was a little flareup that was managed.
I don’t know if you were there during that but whatever policies were put into place, whatever risk management policies came in really helped JPMorgan navigate the great financial crisis with very, very little damage. Did that overlap with your time when you were there?
ELLIS: Well, I mean, clearly, I left well before the financial crisis. But I think there had been a number of — I mean, as you grow with derivative business and you’re learning things, there had been a number of shall we call them small minor hiccups, some of which were, at that time, seemed extremely important.
But when you look back, they were quite small numbers compared to financial crisis. But I was part of the sort of the old pre-Chase merged to JPMorgan where risk management was really the number one thing they taught you and Jamie Dimon, obviously, has a fantastic guide for risk management.
And so, those two things together clearly has helped them operate through the next 20 years and go from being — at the heart when — back when I was there, people looked at it as a very upper class type of business. But it was really sort of a powerhouse away from derivatives. And, obviously, today, it’s — well, it’s the most successful investment bank.
RITHOLTZ: Earlier, we were discussing your time running the equity derivatives desk at JPMorgan. How did you get to the Man Group? What brought you over there?
ELLIS: Well, so after the JPMorgan, I had 10 years building a fund-to-funds business with my original boss, Blaine Tomlinson. So, he and I were partners in building up a fund — a hedge fund business called FRM, which was a really — again, that was my sort of second experience of building something, this time, a private business.
It was really interesting and entertaining and I thought it got as big as it could get on its own. I tried to convince Blaine that we should sell the business. We had a couple of gos of getting extremely close to selling the business but he really couldn’t bring himself to let go.
And so, I said, OK, well, if you’re not going to sell the business, then you have to buy me out. And I actually retired at the end of 2007. So, I had the good fortune to be retired (ph) during the financial crisis and to be not emotionally involved in what was going on which has definitely gave me a longevity.
And various friends running various hedge fund businesses asked for help during the course of the crisis. And so, I was you could call it consulting but it was essentially helping friends with their businesses to think about what — how they survive, what they could do, what they couldn’t do with amazingly fast-moving period.
And of those was a business called GLG that at that time was run by a guy called Manny Roman who’s sort of an old equity group friend of mine. When things calmed down in middle of 2009, I carried on doing sort of one day a week helping Manny at GLG, which was nice and interesting, but I didn’t have any urge to go back full time. So, I was sort of doing one day a week.
And then, what, 10 years ago now, so, spring of 2010, Man Group made a bid for GLG and succeeded in buying GLG. And in looking at — I understood the GLG business very well. I also understood the Man business reasonably well given it was sort of made up of CTA and fund of hedge funds and I could see that the job of sorting out this merger was going to be extremely hard work but rather intellectually interesting.
And so, in effect, I put my hand up and said, hey, Manny, you talked to me about coming fulltime to work with GLG. Well, now, it’s going to be combination of Man and GLG, I thought it’s really quite fun.
And so, I signed up to join Man as part of the team that was — that turned around the business since we put these two things together. So, sort of …
RITHOLTZ: That’s quite fascinating.
ELLIS: … came in knowing it was — I came in knowing it was a turnaround and thinking that I built two businesses, I’d enjoyed building two businesses but I wasn’t that excited about starting to build another new one. But a chance to turn around some big quite complicated things seem rather exciting and sure enough it was.
RITHOLTZ: So, let’s say with that, turning around a giant hedge fund that had ran into — I don’t even want to say trouble but had become very complex, very complicated and perhaps some of that was not showing up in the performance numbers or at least it wasn’t consistent.
If I recall that era, Man Group was a little inconsistent across different strategies, across different managers. Tell us what you saw when you arrived and how did you turn a giant multidiscipline, multi-manager funds around.
ELLIS: So, I mean, there was a lot going on. The big thing was that during the pre-crisis period, Man had specialized in selling these structured products, sort of 10 years structured products, which actually the clients did very well over time.
But they basically took a CTA, a fund of hedge fund and a capital guarantee rolled it all up together. But importantly, Man Group earned enormous fees out of those by any comparison.
So, Man had the highest fee margins by multiples of five or six in the industry but they also had a cost space that was a multiple of anybody else in this cost space. And what was clear was in a post-crisis world, the structured products with those sorts of fees were unfillable.
And so, you could see in the future that we had to build a new stream of revenues for the business and a new form of distributing the product and we also really have to sort out the cost space. So, I think roughly the numbers went at the point of the merger that were about 2, 400 people in Man Group and at the low when we finished all of the cost initiatives that we needed to do that were about 750.
So, very significant cost removal exercise. Combined with that, we had to make sure that the investment processes were really focused on alpha generation and that required some — a mixture of change of people and change of emphasis on what they focus on.
And then thirdly, we had to build an entirely new distribution process. In the pre-crisis world, the structured products were basically Man paid other people to sell them for them and they were sold to retail around the world with an average ticket size of $10,000. What we did was to build basically from scratch institutional sales process.
So, today, we’re an 80 percent institutional business and even the other 20 percent is what we think covers retail business is JPMorgan private banking, it’s Morgan Stanley’s wirehouse. We don’t do any direct-to-individual type of selling at all these days.
RITHOLTZ: Quite interesting. So, most hedge funds we know about are not publicly traded entities. Why did Man Group decide to go public?
ELLIS: Well, clearly, pre my time and I would say that at that time, Man Group was more of a holding company and the hedge fund was one of a number of pieces within the puzzle.
And so, I mean, Man has a rather wonderful story and history. The business has been — the firm has been around almost 240 years, used to have a monopoly in supplying run the Royal Navy. So, it doesn’t sound like much of a business.
But everybody in the Royal Navy used to get what’s — not quite half a pint of rum every day and they have a monopoly providing that. It was a very good business for a long time.
So, they were sort of quite late to the asset management saying it wasn’t their nature they were a commodity dealer but more of principal. And through — essentially, the acquisition of AHL, which is the CTA within the firm or the platform that came from the CTA. They started in the asset management business.
And so, when they went public, they were thinking of themselves as a financial conglomerate. As a hedge fund business, there are things we gained from being public and there are things we lose from being public. The truth of it is if you’re a private hedge fund business, I wouldn’t recommend going public.
As a public hedge fund business, I wouldn’t recommend going private. It’s — there were swings and runs about gains and losses. It’s absolutely fine but it’s sort — this process of minuses in the columns.
RITHOLTZ: Look, let’s talk a little bit about the state of the industry today. Things are pretty challenging for a lot of hedge funds really since the great financial crisis, the past decade plus. Why is it that so many hedge funds have been struggling, and the obvious follow-up question, and how come you guys have not?
ELLIS: I think that one of the things that we’re seeing in many industries with the rise of technology and I think it’s primarily driven by technology but it’s an interesting question because you see it in many different industries is the strong are getting stronger and the weak are struggling to survive.
And the hedge fund business is a very Darwinian industry and what you’re seeing is that the larger hedge fund platforms have actually done very well over the last five and 10 years and have grown and have got with size that I actually have been able to invest more and thereby create bigger barriers to entry, which creates competitive advantage which makes it even harder for the smaller hedge fund.
And so, 20 whatever years ago when I started in the hedge fund business, it was all about looking for the next 100, $200 million hedge fund. The reality is that’s not really an economically viable business anymore.
And so, what’s been happening is the concentration of the alpha with the people who can afford to invest in the technology, who can afford to invest in the best people and is squeezing out the smaller players. So, you hear a lot of stories of people struggling in the hedge fund industry because by number of hedge funds, that’s right.
But when you look at it in terms of the overall industry, actually, it’s in rather good health. It’s just the good health is getting concentrated in first the top 500 and the top 100 now, maybe the top 20 players.
RITHOLTZ: Winners take all. We see that across a lot of industries. So, you mentioned technology …
ELLIS: And I think it’s particularly something around this technology question because one of the big differences between human process and technology process is when you develop a human process, the next day, you have to repeat roughly the same process again in order to check everything go right. And so, the amount of new research you do is relatively constraint.
When you have a technology process, once you got the technology running, you really need to spend very much time at all making sure it’s doing what it’s supposed to be doing. And so, you can put 90 percent of your time into new research.
And that means that you get a compounding effect that over time really is a significant benefit to the technology-empowered business over the one that is sort of dragging in suite (ph).
RITHOLTZ: Quite fascinating. So, during the first quarter when the market dropped pretty substantially, you saw a drop of only 11 percent. A lot of hedge funds did much, much worse than that. What did you guys see to get this right or as more systematically, what was the technological edge that helped you avoid the full 30 plus percent downdraft so many other funds suffered?
ELLIS: So, I think one of the things just to highlight is sort of 60 percent of what we do is hedge fund and 40 percent is long earning. And so, we ran a number of long earning strategies as well within the platform.
And when you look at the returns in the first quarter, the long earning strategies were down — I mean, we had some decent alpha performance but they were down proportionally with the market. Actually, our hedge fund strategies on average made money, small but on average made small money in the first quarter.
And what was that about? Well, I go back to that thing I mentioned about JPMorgan in the beginning. I think that risk management is an incredibly important skill and if you look at our positioning on the 15th of February, just before the market turned, we had good positioning for the way the market was then and therefore, horrific positioning for where the market was two weeks later.
But we’ve spent a lot of our time and energy on investing in our risk processes and particularly a sort of strong belief that the simple answer to risk management is if you don’t like a position, don’t try and find some complicated hedging strategy, get rid of it.
And so, in order to do that, you have to spend a lot of time and effort on your execution process. But basically, what we were able to do is the systems recognize very quickly that they had the wrong positioning as the market started to sell off and we got out of that positioning very quickly by the end of February so that we could make money as the market continued to sell off down into the end of March.
And it comes from very good risk management system and to the risk management built in to everything we do. But really important, the execution platform because the markets got pretty crazy as we all remember during that period and doing your execution in a smart way was really important because if you were a bit sloppy about it, you could get terrible slippage.
So, you could be leaving loads of money on the table. We, because of the investment we made and that execution, were able to get out of our positionings without leaving lots of bid or offer (ph) on the table.
RITHOLTZ: Very interesting. What do you make of this recovery? Here we are in the second week of June. NASDAQ is up to all-time highs. S&P not quite back to all-time highs but just about positive for the year. Have we come too far, too fast or do you just let the technology guide you on those decisions and not sort of spitball market commentary?
ELLIS: Well, I’m always happy to spitball market coming through. But the machines will do what the machines do. They don’t do what I tell them to do. That’s for sure.
But quite interestingly, they don’t really believe in this rally either, which is something about history. Look, it’s very easy to see how the first half of the rally happened given how quickly we sold off perfectly normal in market. Behavior sort of rebound normally for the shorts to reset if you like.
And then we saw this amazing wave of retail buying that came in sort of from the middle of April onwards that has really driven the rally up here. And I think it’s easy to look at valuations where they are now and think that the valuations are going down from here now. Whether that happens in the next month will depend on more buyers or sellers. I mean, this is — the market is being driven by technical.
But I think somewhere over the summer, it’s almost inevitable the sort of buying frenzy from retail is running out of spin. The issuing (ph) from companies is not running out of spin and there’s a point where that’s going to create more sellers than buyers and we’re starting now the leg down.
How far that goes will be an interesting question, I think.
RITHOLTZ: So, essentially …
ELLIS: But we’re in that valuation which basically says — the current valuation says 2021 earnings have to be at least as high as 2019 earnings and you’re happy to put on a multiple a bit higher than we had in 2019. Myself — I mean, you can debate multiple spots (ph).
Even if the economy — I think the most optimistic view of the economy would be that it returns to something like 2019 sort of absolute GDP in 2021. I think it’s projected (ph) to be lower. In that process, I think that you’ll likely to see higher cost of companies and higher cost of capital because they’re likely to run more conservative balance sheets. They’re going to have to pay the geek type of workers more.
And so, I think the margins that companies had in 2019 are not going to be seen in 2021. But at the moment, this market is being driven purely by technical and every day there are more buyers and sellers, you go up.
RITHOLTZ: Before we get into some more details about different strategies and what’s working and what’s not, tell us a little bit about your role as CEO. Ae you overseeing investments? Are you overseeing investor relations, running the day-to-day business? Man Group is a pretty substantial complicated business to run. What demands your attention the most?
ELLIS: The interesting thing is it’s sort of not what people expect. So, I probably – maybe I spend 10 percent of my time on corporate stuff. We are, as you say, a public company that requires certain amount of things.
But I spend very little time with our shareholder. I provide them with the information and then leaves them to make their own decision. I spend 10 percent of my time on clients, sort of 10 percent of my time on the sort of other aspects of business management.
And what I spend most of my time on is really the people. I have strong views about markets. I talk markets over time with the different people at work. But I don’t influence anybody’s investment process. But I spend a lot of time on getting people to work together well and making sure that they’re happy in their job, making sure that people that are having a tough time have an arm around the shoulder.
Making sure the people that are doing really well don’t get cocky and you poke them hard so that they don’t get arrogant about it because we’ll know whatever your investment style is, at various points, the market will love your investment style and you look really clever and there are times when the market will hate your investment style.
And what we want is people and whether it’s discretionary or quant to stick to a process. And so, my job to keep them motivated, keep them working together. Make sure — provide leadership to the people because in the end these businesses are all about the people you have within them.
RITHOLTZ: Quite interesting. Let’s talk a little bit about what the various worldwide governments responses have been to the pandemic. Central banks have slashed rates. They’ve injected a ton of liquidity.
Lots of governments have done large fiscal stimulus …
VOICEOVER: Take the bond challenge. Use the free Interactive Brokers bond search tool to search their deep availability of U.S. government securities, 34,000 global corporate bonds and 850,000 municipals. IBKR passes through the highest of all bids and lowest of all offers received at the electronic venues it accesses.
Interactive Brokers does not widen spreads, apply hidden fees or markup quotes. How many basis points does your current broker keep? Find out that at IBKR.com/bonds.
RITHOLTZ: How much of this rally is being driven by all this government largess and how much of it is a bounce back from the fastest down 30 percent I think we’ve ever seen in market history?
ELLIS: Yes. I think we’ve hit the fastest, quickest, largest everything in the last — actually, in everything compared — the last time that this all happened was in the 30s, which is a slightly scary thought of all.
I think what you’ve got going on is you have a serious tsunami of pain in the real economy out there. Even with the slightly strange unemployment numbers that we had on Friday, we’ve had a 10 percent in unemployment in the space of two months and in many countries, it’s a lot worse than that.
When you talk to anybody running a small business in the sort of — that’s not in the financial markets, in the real economy, they’re having a miserable time. And on the other side, you’ve got this incredible ways of money that come from governments and central banks getting harder and harder to tell governments and central banks apart to be honest.
ELLIS: That has — to something I alluded to earlier, that has definitely benefited a lot of the larger companies, that’s where most of the money has gone to. And so, there is something understandable that says large cap stocks are doing relatively well in a world where the overall economy is still doing poorly because there will be market share gains of big companies that are involved in this I believe.
But one of the troubles of trying to put valuations on the market or valuations on individual stocks is this enormous wave of money in the different directions, people are trying to get the inputs to their share model that, this SOTP (ph) valuation model that they had a year ago, what was the input that I should put in for the next year.
I have to say my own sense is you need a different model looking forward because I do think after all of this, there are going to be some material changes over time sort of time scales in the U.S. that’s hard to get given the political situation.
But there are going to be changes for the corporate landscape in the same way that there were coming out of 2008 and ’09 to the financial institution landscape. 2008, ’09 want happened — we can say what we realized, I don’t know, but it’s certainly what happened was that the conclusion banks were too levered and they didn’t take enough responsibilities in their actions and they were not resilient enough in their business
And so, we came out of 2009 with the series of regulation which put leverage limits on banks, it imposed stress test on them so the businesses were more resilient and put personal liability into the management of the banks. I think personally that we’re likely to see similar types of things come out of this but applied to the corporate world because what happened after 2008, ’09 was bank leverage went down and corporate leverage went up a lot.
And so, we came into the crisis with all of these companies with absolutely no resilience. Not — again, not all of the companies. You could see why an Amazon or an Apple have done incredibly well through all of this because they have incredibly robust balance sheets.
But if you look at a whole bunch of the names which have struggled, you see that they had huge leverage and no ability to expand two, three months of — I mean, they’re certainly in extreme shock. But still to withstand two or three months of no income is not — I don’t think that’s an unreasonable thing to expect a company to run with that amount of resilience. And I think you’re likely to see regulation coming out of the other end of this which starts to drive that behavior into company.
RITHOLTZ: We’ve certainly seen that in the just-in-time delivery for essential medical and food supplies. I wouldn’t be surprised to see some regulations change with that. When the supermarkets don’t have toilet paper for a month, that doesn’t say your society is especially stable, does it?
ELLIS: There you go. And toilet paper was — I mean, it’s a perfect place to chart on this and one of the things is when you think you might run out of toilet paper, you’re willing to pay any price for it. But that’s good for an economy.
So, I think the just-in-time inventories is another form of running businesses with extremely low resiliency. And so, I think that either through company management or through regulation, there is going to be a push for companies to run with more inventory, to run with shorter supply lines and if you got a longer supply line, then it’s going to have more — even more inventory built into it.
All of these things are likely to come out of the other side of this crisis and when we move from companies having sort of a year of spare part inventory to just-in-time manufacturing, the root of — direction was a good one. But I think in the way that happens if there’s no regulation, it went too far.
I’m a huge believer in capitalism is best system there is but it shouldn’t be untrammeled. It should have some constraints on it and if you actually go back and read Adam Smith who is everybody’s foster child for the father of capitalism, actually, when he talked about the invisible hand in the rest of the chapter, he talks about the fact that invisible hand needs some constraints to stop it going too far.
RITHOLTZ: Absolutely. So, let me shift gears a little bit and ask you about a different sort of practice within the Man Group. You have a private practice focusing on real estate, single-family homes, financing. Tell us a little bit about that practice and what you are looking at going forward.
Some people have posited that following the pandemic, there’s going to be a little bit of an egress out of the city and into the surrounding bedroom communities where you have a little more space and a little more room to deal with either a pandemic or a shelter-in-place situation.
ELLIS: I think that’s right. I would love to say that we had predicted that part in getting into this business. But I think what we saw was in the space, two big things happening. One has been a gradual drift to people from I guess you’d call it something like the northeast down in the direction of the southeast to south in terms of moving from parts of the country where the cost of living is incredibly high to parts of the country where the cost of living is more manageable and that suits both the individuals and the companies.
So, the cost of having a three-bedroom in commuting distance to a bank in Manhattan is crucifyingly expensive. The cost of having a three-bedroom house in commuting distance to Bank of America in Charlotte is — it took us a couple hundred thousand dollars and therefore, well within the sort of capability to people.
But the second thing we’ve seen is that after the financial crisis, there is a whole generation of people who don’t see houses as a store of value. In the U.K., still there is a sense of the house (inaudible) store of value. Obviously, a lot of people in the U.S. had real difficulties in financial crisis with housing finance.
And so, there is a whole generation that is very nervous of owning their own home who doesn’t see it as a store of value and therefore, it’s really quite happy with rental as opposed to mortgage finance. And so, one can get people who can very easily afford the house but choose to rent it rather than buy it.
We use some technology to basically identify best neighborhoods, best type of houses for the type of renters we’re looking for and part of the thing is this. As opposed to the multifamily lots of apartments patterned (ph) together, this is much more about — the three or four-bedroom family house around the sort of ring road in one of the growing cities where they care a lot about — if it’s a three or four-bedroom house, you’re worried about kids because, otherwise, why you got three or four bedrooms.
And so, you worry about the quality of the local school and so access to the right schools is really important. And then once somebody’s renting and their kids go to a good school, they’re a pretty stable tenant because the last thing you want to do is take your kids out of a good school.
So, we think that’s a very interesting thing where you’re delivering value to the tenants and you can deliver a very decent return to the capital provided to our investors and actually really interestingly through the crisis. So, we’ve been collecting something like 95 percent plus of the rent that we collected by number of tenants at this time last year and actually, more dollars of rent than we collected this time of last year.
So, that’s an asset class. It’s really held up even before, I mean, it’s help up in cash flow even before you start to see the possibility of increasing prices as people start to move out of the big cities.
RITHOLTZ: Quite interesting. Any other new strategies that are being revealed by the pandemic and lockdown or as differently, what has changed going forward as an allocator of capital, what areas are you thinking about as, hey, this is very different post 2020 than it was previously?
ELLIS: I think the challenge for allocators is that everybody’s got used to the idea that the sort of starting point is 60/40 type of portfolio and that was based around the idea that government bonds were a store of value and had a decent yield and were uncorrelated.
And I think we are seeing something through the course of this process of basically central banks funding, government deficits and thereby repressing natural movements and yields. And so, we’ve ended up at this place where the amount of upside in earning treasuries is extremely limited for government bonds anywhere over time and you obviously have a downside if the central bank ever loses control.
And so, I think government bonds globally has gone from being a long-term investment as one of the core pillars of your natural-facing process to basically being a trading instrument. So, there are moments you want to be long treasuries, there are moments you want to be short treasuries, but just owning them as a store of value over time with a nice yield.
That just doesn’t apply anymore and thinking that they’re going to provide you with significant balance in a time of difficulty. Also, really not clear that that happens when you start getting down to these very low levels of yields which are only there because of central bank buying, because of QE.
So, I think there’s a challenge in building successful portfolios for clients over time that really you have equities and the equity-like things like credit, like private equities. They’re all basically growth instruments driven by the same thing.
On the one hand — and you have cash as the alternative. And that say riskier portfolio than the one that clients have had for the last 20 years. And so, we’re doing a lot of work helping clients think about how you manage their overall pension fund whatever it might be in that type of environment.
RITHOLTZ: Quite intriguing. I know I only have you for a couple of minutes more. So, let’s jump to our speed round. These are our favorite questions we ask all of our guests and let’s start out with what are you streaming these days, what are you watching on Netflix or whatever video preferences you have?
ELLIS: I have to say I thought about that one because I’ve heard it in your other questions and I realized we had a rather unexciting time with streaming. It’s partly by the time you get to the evening. We’re not — I’m not after anything very intellectual but we’ve watched “New Amsterdam.”
One thing we watched is a British police drama called, “In the Line of Duty” would we’ve somehow missed over the last 10 years. We went back and started that at the beginning. But fundamentally, television has been really dull. For me, without sport, barely we’re turning the T.V. on for.
RITHOLTZ: Quite interesting. Tell us about some of your mentors. Who helped guide your career when you were young buck?
ELLIS: Well, I have to say the — I tried over my life to get sort of whoever I deal with to try and learn something from them. I’m quite stance for ideas and processes from people.
In a traditional sense though, the — I mentioned earlier, the best manager I’ve ever had was my boss at JPMorgan who is called Ramon de Oliveira who really taught me how to build a team, how to motivate people and I’ve always been super grateful to him for everything I learned from that.
RITHOLTZ: Let’s talk about books. What are some of your all-time favorite books and what are you reading right now?
ELLIS: So, I have to say I’ve been reading a lot in the lockdown. One of the things I realized was getting up in the morning and going straight to my desk was slightly sad. So, that morning commute type of period, I take a nap first hour of the morning and I sit and read which means you get through quite a lot.
I try to read a mixture of things which are good-for-work things, which are — puts the mind expanding in some form of things which is just a bit of fun. My favorite is a book called, “John Macnab” which is a John Buchan book written in ’30s I think and it actually applies incredibly today and it’s basically about three successful people who are suffering from (inaudible). They’re somewhat bored with their successful life and they’ve lost the spark and it’s about how they refine that spark, which I go back to that really quite often.
But in the lockdown, I don’t know if you’ve come across a guy called Matthew Syed who writes some very interesting book. He’s more of a thinker than a Malcolm Gladwell but he’s in the same type of area. He has one called “Black Box Thinking” which is one of my favorite ones because it’s really into how the aviation — I mean, it’s in thinking of how do you create a no-blame culture within a business but it’s really about the difference between the aviation industry where every time there’s a problem, it’s a learning experience as opposed to the medical industry where nobody wants to admit they haven’t got anything wrong.
And he had a new one out just recently called “Rebel Ideas” which is about cognitive diversity and has some very interesting ideas about practical diversity in a business, which is pretty appropriate in the circumstances over the last couple of weeks.
I love wine. I spend a lot of time thinking about wine. I like reading about wine. I’m drinking it more and going around and fiddling in my wine cellar. But somebody got me a book called “Cork Dork ” which is about New York sommeliers which I find it a really good read.
RITHOLTZ: What — I read “Black Box Thinking” some time ago and what I found so surprising and fascinating was that the famous black box is actually orange because as part of their process of always reviewing each problem if a plane crashes in water or in deep forest, black is hard to see and orange is easy to see. So, even the fame black box itself is actually a different color, that’s how serious they are about learning from the process.
ELLIS: Exactly. And then (inaudible) learn from a process and trying to get better. I definitely try to follow a lot of those ideas in my day-to-day process.
RITHOLTZ: Quite interesting. What sort of advice would you give to a recent college graduate or recent university graduate who was interested in either the world of investing or systematic trading or anything quantitative having to do with finance?
ELLIS: So, the first one will be simple which is if you haven’t done it already, go and spend time learning to code in Python. Python is one of these languages that — it’s a new generation language where — it’s one of these ways of language where you can get real compounding of ideas because you don’t have to code everything from first principles if you can take chunks about the people’s work.
I think that’s really important in terms of — one of the interesting things at Man is while obviously English is the first language of Man and we have — I think we’ve worked out 52 different first languages in employees in the firm, the second largest human language is Mandarin.
So, if we’ve got 1,400 employees sort of call it a thousand of them their first language might be English, 150 their first language would be Mandarin. But we have about 600 people who code for living in Python. And so, really Python is becoming more and more the (inaudible) of our business and I think for anybody who has an interested in this sort of areas, it’s a real necessity.
The other is something I would always tell people is don’t choose a job because you think it’s the one way you can make the most money. Choose a job because it’s the one way you’re interested where you get intellectually challenged by it because actually predicting where — which should be the most profitable jobs in 10 years’ time, I don’t think I’ve ever seen anybody succeeded that.
But you’ll never succeed at something which you’re doing just for the money whereas if you’re doing something with passion, that always the thing you’ll do best.
RITHOLTZ: Quite intriguing. And our final question, what do you know about the world of investing today that you wish you knew 30 plus years ago when you were first getting started?
ELLIS: That’s an interesting one in terms of — there are easy answers like I wish I knew that rates were going to go down to nothing. But the reality is — I mean, I’ve had a great run and I’m not sure I would change what happened in my 30 years of my career by knowing something different at the beginning.
So, what I would say is what I hope I did which is try to make everything a learning experience. When you talk to somebody trying to figure out not what’s wrong with them but what did they know that you don’t know. When you see a problem trying to figure out what you could learn from it. And then over the long run, you’ll do really, really well out of that.
RITHOLTZ: Thanks, Luke, for being so generous with your time. We have been speaking with Luke Ellis, CEO of the Man Group, the world’s largest publicly- traded hedge funds.
If you enjoy this conversation, well, be sure to look up an inch or down an inch on Apple iTunes where you can see all of our previous 300 conversations over the past, is it six years, seven years, I’ve lost count. You can find our previous broadcasts at iTunes, Spotify, Google podcast, Overcast, Stitcher wherever you find our podcasts are sold.
We love your comments, feedback and suggestions, write to us at [email protected] Check out my weekly column on bloomberg.com Opinion. You can sign up for my daily reading list @ritholtz.com. Follow me on Twitter @ritholtz.
I would be remiss if I did not thank the crack staff that helps put this conversation together each week. Michael Boyle is my producer, Mary Foll (ph) is my audio engineer, Michael Batnick is my head of research, Atika Valbrun is our project manager, I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.