Man Launches US Equity FoHF Into Choppy Waters
Wednesday, October 12, 2011

As new figures show that hedge funds largely rode out the storm in the equity markets last month, Man, one of the world's largest listed hedge fund providers, has announced the launch of the Man Long Short Fund, a new long/short equity fund of hedge funds targetting US high-net-worth (HNW) individuals.

Man said on October 10 that the fund will be available only to HNW clients of the top-tier broker dealers and advisers with an investment minimum of USD50,000. The fund will invest in up to 30 leading long/short equity managers to provide a diversified portfolio, with money allocated to managers in the US, Europe, Asia and Emerging Markets.

Given the recent weakness in the world's equity markets, Man believes that: "The potential downside protection exhibited by long/short equity strategies is the key to their return profile and the basis through which these disciplines can offer more positive risk-adjusted returns relative to traditional long-only equity strategies".

"With a few notable exceptions such as the Fall of 1998, the spring of 2003 and the first quarter of 2009, the last 15 years have been a poor period to invest in the stock-market," said Robin Lowe, Head of Equities at Man Investments, based in New York. "It is common to see a pattern of long bull markets (e.g. 2003-07), punctuated by shorter, sharper bear markets (e.g. 2008). The fundamental justification for the long/short equity approach is not simply that tactical shifts in net exposure to equities can add value: the very existence of a 'short book' is essential to help ensure a degree of downside protection in the event of an abrupt market reversal."

While hedge fund returns generally turned in another month of negative returns in September, especially those focussed on equity strategies, many managed to ride out the worst of the falls in the equity markets, according to the main hedge fund performance trackers.

Hedge funds as measured by the Greenwich Global Hedge Fund Index declined by 3.08% last month, but this compared to global equity returns in the S&P 500 Total Return of -7.03%, the MSCI World Equity of -8.85%, and the FTSE 100 of -4.93%.

In contrast, global macro and managed futures funds managed to produce modest returns last month, gaining 0.22% and 0.17% respectively.

“Most hedge funds performed relatively well in dodging the market volatility on the month with the exception of some long-short equity managers," noted Clint Binkley, Senior Vice President. However, he added that macro and futures funds "held up exceptionally well given the global uncertainty".

Binkley is of the view that market neutral and other alternative hedge fund strategies should continue to prove their worth in the currently unstable market environment.

Market Neutral funds post mixed results, declining nearly 2% on average last month, according to the GGHFI.

Meanwhile, emerging market funds suffered badly last month, falling by 8.5%. Developed markets funds fell by a more comfortable 2.13%.

Man argues that the traditional arguments for maintaining an allocation to equities remain strong despite recent financial shocks and lacklustre performance. Academic research, the firm says, generally holds that equities have more scope to generate investment returns than bonds or cash over the long-term but with much higher volatility or risk. However, the company questions whether a 'long-only' approach to equity investing is the right one.

"Average portfolios are still overexposed to equities," said Art Holly, Head of Portfolio Management for Man North America. "We are trying to produce a "smoother" ride by capturing 60% to 70% of the potential upside return of equities but more importantly only striving to participate in 30% to 40% of the downside. I believe it's much easier to return to equity highs from a 10% drawdown than it is a 50% drawdown where you need to make 100% return on your capital just to break even."

"Equity investing has evolved since the 1970s from mutual funds, to style box investing, ETFs, and short-extension strategies. While long/short equity is not a new strategy it has now become a widely accepted investment technique," said John Barbo, Head of US Financial Intermediary Business at Man. "In an uncertain market environment, investors may benefit from allocating to long/short equity strategies. I believe this makes long/short equity a compelling substitute for long-only equities in a portfolio."