Black box trading drives descent of Man

May 29, 2009

REUTERS– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Apparently, investors in Man Group’s flagship fund value liquidity and safety above performance. At least Peter Clarke, the company’s chief executive, hopes so.

He needs them to do so because, over the last five months, the investors in AHL, Man’s “black box” quantitative fund, have been suffering. Unlike many rival funds, Man did not “gate” its funds during the market panic, and Clarke believes that investors will remember this and reward Man for it.

Clarke says that the punters, who account for the bulk of Man’s $44 billion of funds under management, bought $2.6 billion of Man’s funds since the end of March, but the institutions are still running for the exit.

Moreover, private investors are switching out of guaranteed products, which put a floor under investors’ losses and which generate a higher margin for Man, into lower-yielding open-ended funds. Moreover, institutional investors are continuing to withdraw their money.

Man maintains that they are taking cash out because they can — other funds remain locked up-and that the trend will moderate soon. As Clarke put it, investors are looking for more exposure to the market.

However, quantitative, “black box” funds, like AHL or the famed Renaissance Technologies in the U.S., which follow market trends, are designed to do well whatever the market does. Perversely, this means they often do badly when the market does well.

AHL did well last year, generating a return of 33 percent when world stocks fell almost 40 percent. However, it completely missed out on the recent rally.

As Man admits, it does cope well when the market whipsaws. Man is investing in a new Oxford research centre. However, any new algorithm is unlikely to come fast enough to address the collapse in its assets under management.

This has had a catastrophic effect on both performance and management fees, driving a 40 percent fall in profit last year. Clarke says that he sees no pressure on the 4 percent-plus annual fee that Man charges its private customers.

He has, however, detected a demand for transparency. Once investors see how much they are paying for Man’s products — especially when they are not performing — they will continue to put their money elsewhere.

(Edited by David Evans)

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