The Lowdown: Hedge funds are 'victims of their own success'

Man Group's Stanley Fink tells Heather Tomlinson his industry is more sound than UK investors think

Sunday 25 May 2003 00:00 BST
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Ask the man on the street what a hedge fund is, and you are likely to get a blank look. If he recognises the term at all, he might associate it with the infamous George Soros, who made $1bn (£610m) from a bet against the pound and caused it to crash out of the ERM, leading to "Black Wednesday".

For UK investors, hedge funds are best known for short selling, where a trader sells a share he doesn't own, hoping its price will fall, giving him a profit.

The practice has been attacked for pushing the stock markets down and causing volatility in share prices. But Stanley Fink, 45, the smart and articulate chief executive of Man Group, the world's largest independent hedge fund company, is as calm as calm can be. That could be something to do with the company's funds producing a return of between 32 per cent and minus 1.9 per cent last year, while the FTSE 100 fell by 29 per cent. Man's funds under management boomed 120 per cent to £16.5bn and profits were up 53 per cent to £297m in last week's annual results, its fourth year of rapid growth. Its shares have nearly tripled in value during one of the worst bear markets in history.

But although Man Group is the largest independent hedge-fund manager in the world, is based in London and is half way up in the FTSE 100 index with a valuation of £3.7bn, British investors are not interested. Less than 1 per cent of Man's funds under management come from UK customers; Europeans and investors from the Far East take the lion's share.

But it is nothing to do with the Soros effect, it is the British "love of shares," according to Fink. "You've got to put it within a historical perspective," he argues. "Everyone quotes the fact that with a long-term view, equities are always safe. But no one ever looks at the data on Japan, on Germany, Poland or Russia.

"In the UK, equities have been successful. But if you look at a lot of places, if you have had a world war, a change of the political system, hyperinflation, or devaluation, equities have been a disaster. In the UK you've never suffered that."

High inflation in the UK made equities and property more attractive, while the low capital gains tax relative to income tax also made gains on share sales look good. "Which has meant selling alternative products is more difficult. Also, because of the welfare state and how it operates, the Brits don't save much. The median Brit has less than £1,000 in liquid savings, while a Swiss or German probably has 10 to 20 times that. There's a lot more people there with £100,000 to invest, whereas in Britain those people only work in the Square Mile."

But the high returns are starting to get noticed, and Man's surprise sponsorship of the Booker prize has increased its profile. However, in the UK, hedge funds cannot market their products to retail investors, but must go through an independent financial adviser to protect the inexperienced.

It isn't just marketing that attracts the attentions of regulators. In the UK, the Financial Services Authority has proposed that the amount of short selling in a company be published, rather than be revealed by rumours flying around the markets. In the US, the regulators are even more on the tail of the hedge funds. The Securities and Exchange Commission, the US regulator, is nearing the end of a year-long inquiry, and is likely to impose restrictions. The American equivalent of the Inland Revenue, the US Treasury and the New York Attorney General, Eliot Spitzer, are also investigating the industry.

Fink thinks that the industry is a victim of its own success. "When stock markets are going down, but hedge funds managers are making money, people want to know why," he says. "Short selling was the scapegoat. The reality is that the industry is long of shares, not short. The main selling has come from insurance companies having to liquidate their portfolios because their regulatory capital is low.

"If something is doing well while everything else is doing badly, it is easy to turn on it. You saw it in Africa when the Kenyan Asians were doing well, at a time when Kenya was suffering, and it has happened to Jews in many parts of the world."

But although North America is taking a hard look at the industry, it still holds around half of the $600m hedge fund asset base. Man has not traditionally been strong there, but it is gradually starting to expand. "A couple of years ago we said, look, if we really want to grow at 40 per cent per annum, at a certain point it gets tough to ignore the world's biggest market for your product" says Fink. "A decision was made on a low-key, low-cost basis to establish ourselves in the US."

Although the company has also been opening private equity and high-yield products, the bulk of its investments are hedge funds. But Fink sees plenty of room for growth in Man's traditional speciality, even after four extraordinary years of growth. At the moment, hedge funds make up 2 per cent of liquid assets worldwide, but he predicts they could get up to 5 or 10 per cent.

Fink has been a board director of Man since 1987, when he was just 28. He was finance director when the company floated in 1994. He was appointed chief executive in 2000, the year when the company demerged from its historical business, trading commodities such as sugar and coffee.

Now, Man also has a derivatives broking business. However, derivatives have also got a bad name - they were recently described as "financial weapons of mass destruction" by investment sage Warren Buffett - and cause most people to scratch their heads.

"The comments made were right to a degree, but you've got to separate one type of derivative from another," Fink says. "It's a bit like saying drugs are dangerous. Aspirin is a drug, and so's cannabis and so's heroin. But they are different. I'd say that simple derivatives are a straightforward thing, and most people can understand them in their sleep. Some complex derivatives should be handled carefully."

It is this concern that makes some investors shy away from Man's shares, fearful that the company's extraordinary growth could come to an end, or be blown off course by a bad trade. But Fink says that Man's positions on the market are closely monitored - every single one is put on Fink's desk every minute of the day. "Most of the problems are not derivative problems, they are management control problems," he says.

"When you issue good results, people try sometimes to look for the problems. It's human nature. Some people are looking for the catch. There really isn't a catch. This is a good business model."

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