Performance in extreme markets

Our 2008/9 financial year saw extraordinarily difficult conditions for hedge funds. An easing of the credit crisis in April and May was short-lived, and was followed by sharp sell-offs in global equity markets in June, July and August. This was just the beginning.

September and October were the most devastating months for the financial industry in general and triggered widespread de-leveraging across the hedge fund industry. Hedge fund strategies such as relative value, which rely heavily on leverage, were affected most by the de-leveraging process. As de-leveraging accelerated during Q3 2008, more and more funds used gates to suspend or slow redemptions and fund of funds were faced with the challenge of balancing underlying manager suspensions and client redemptions. The hedge fund industry ended 2008 with its worst calendar year performance on record. 2009 has started more brightly, with the HFRI Fund Weighted Composite Index back in positive territory.

Performance of Man's Investment Managers

Against this backdrop, there was significant variation in the performance of Man's investment managers.

Managed futures as an asset strategy and AHL in particular delivered stand-out performance, reinforcing the non-correlated nature and diversification benefits of this style. Find out more...

RMF, which specialises in developing and managing hedge fund portfolios tailored to the needs of institutional investors, outperformed fund of fund benchmarks, mainly due to its managed futures allocation. However, it suffered high levels of redemptions as investors took liquidity from those still able to provide it, regardless of performance.

Man Global Strategies (MGS), with more concentrated portfolios targeting higher returns and volatility, was negatively affected by market conditions. This led to an investment management decision in October to de-risk these portfolios by removing leverage, to protect investor capital.

Glenwood, whose portfolios are generally incorporated into private investor products such as IP 220 and OM-IP, was also hard hit by market events, given its overweight stance towards styles such as event driven and relative value.

In the course of the year, Man took a series of steps to refocus investment management activity as markets evolved.

The activities of Man ECO, launched in 2007 to develop opportunities in the environmental space, were substantially scaled back as the fall in the oil price reduced opportunities to generate absolute returns. However, RMF continues to allocate to environmentally themed funds on behalf of institutional investors.

Ore Hill, the US credit-focused manager in which Man owns a 50% equity interest, recapitalised its international and onshore US funds in the course of the year, and investors extended their redemption period. Pemba, the European credit manager which was acquired by Ore Hill, was re-integrated into Man under the auspices of RMF, reflecting reduced opportunities in structured credit and the need to focus Ore Hill on their main credit strategy. The main investment structures in Pemba will be managed to maturity by RMF.

Following the MGS de-risk, work began to combine MGS with Glenwood. These initiatives culminated in the decision to create a new hedge fund management business in March 2009, together with RMF, which is discussed in more detail.

De-risking of Man Global Strategies - prudent investment management for the benefit of investors

The MGS strategies adopted a focused allocation to a group of managers consistent with achieving their targeted risk/return objectives. The leveraged allocations to relative value and event driven managers resulted in sudden investment losses in September and October as both of these strategies became similarly correlated and markets became illiquid. This led to an investment management decision in October to de-risk the MGS portfolios by removing leverage and triggered an associated rebalancing of MGS products, required to maintain an appropriate balance of investment styles within the investment mandate. The de-risking was facilitated by our managed account platform, which provided control over investors' assets during the liquidation process.

The overall effect of these actions was to reduce funds under management (FUM) in MGS products by $12 billion - the principal cause of FUM reduction for Man in the 2008/9 financial year.

From the perspective of MGS investors, the investment management decisions taken corresponded to their expectations: investment exposure was quickly and efficiently reduced; trading capital was preserved; and all capital guarantees remained effective in accordance with product terms. At the conclusion of the de-risking, a number of products had minimal trading capital and therefore will not continue with investment exposure. These products still have the full protection of the guarantee and in some cases investors will receive a return in excess of their original invested principal. At all times during the de-risking process, investors who chose to redeem their investments had their net asset values paid out in accordance with the terms of the products. A number of investors chose to switch their investment into other Man products. The remaining investors can either hold the product to maturity, redeem, or switch their investment at the regular monthly dealing day.

While the de-risking of the Man Global Strategies portfolio caused a sudden reduction in our funds under management, and an acceleration of amortisation of sales commissions, it is important to remember that our primary obligation as the investment manager is to our fund investors and the independent fund boards under our investment management mandate. The de-risking process was overseen by the independent fund boards who act in the interests of all investors in the product.

A consequence of the de-risking of the Man Global Strategies portfolio was the repayment of $4.8 billion of fund financing to the banks. This process was carefully orchestrated with the banks and the full amount of all outstanding financing was repaid on 31 December 2008 in accordance with the agreed plan. No bank suffered a loss on their financing to the funds. In a market environment where credit risk was a particular concern, we protected the banks and this has created significant credibility, not only for the funding structures but the process by which the funds systematically de-risk. This credibility places us in a unique position with our banking partners and allows us continued access to financing for the fund products.

From an investor's perspective, our actions were validated by the continued negative performance of event driven and relative value strategies in the remainder of 2008, which could have depleted investor capital had prompt action not been taken.