Big Man in Hedge Funds Says "Risk On"?

Bei Hu and Susan Li of Bloomberg report, Man Group Sees Hedge Fund Demand From Asia-Pacific Investors:

Man Group Plc, the world’s largest publicly traded hedge fund, is seeing demand for hedge funds from sovereign and institutional investors in the Asia-Pacific region, said Chief Executive Officer Peter Clarke.

“They are looking for a degree of capital protection,” Clarke said in an interview with Bloomberg Television in Hong Kong today. “They’re looking for liquidity in uncertain markets. And most of them have the requirements to continue to deploy assets in markets.”

About 37 percent of institutional investors in the Asia- Pacific region plan to increase allocations to hedge funds, helping expand the assets in the global industry, according to a February survey by Preqin Ltd., a London-based research firm, and the Global Absolute Return Congress, a meeting organizer.

The investors have retained interest in hedge funds even after 68 percent of them said hedge fund returns in 2011 failed to meet their expectations, according to the survey. Hedge funds globally lost on average 5 percent last year in the second-worst annual return since Chicago-based Hedge Fund Research Inc. started to track data in 1990.

More Risk Taking

Clarke said he also sees investors taking more risks, adding that equity long-short funds that bet on rising and falling stock prices will do well, he said. Credit and commodity-related strategies will also be appealing to investors, he added, without elaborating.

“This is the beginning of a significant shift from bonds into equities and other strategies,” he said.

Man Group’s assets under management rose 1.9 percent in the first two months this year to $59.5 billion, reversing last year’s decline, as investor redemptions slowed.

It raised about a quarter of its global assets from Asia as of September. In November, it appointed Li Yifei to head its Chinese office. Li worked for Viacom Inc. in China and was managing director of the entertainment company’s MTV Networks division in the country.

International hedge funds registered in Shanghai may be allowed to raise $5 billion in the Chinese currency for overseas investment, the country’s Caixin Online reported on March 1.

Europe Debt Crisis

Europe’s sovereign debt crisis led to investment losses, prompting investors to redeem from Man Group’s funds in search of safer assets last year. Analysts cut their estimates for Man Group’s 2012 earnings, concluding that the decline in assets and the investment performance of its largest hedge fund, AHL Diversified, would threaten fee revenues.

Clients withdrew a net $2.5 billion from Man Group’s funds in the fourth quarter amid concern that the European debt crisis would make it more difficult for money managers to make profits. Since the end of March 2011, assets managed by the firm have fallen 14 percent from $69.1 billion.

The company’s investment funds, which include hedge funds and the so-called long-only strategies that bet on rising asset prices, lost a net $1.5 billion in the fourth quarter.

AHL, a $21 billion program that uses computer algorithms to spot profitable trades in futures markets, climbed 2.5 percent this year through Feb. 27. Man Group bought GLG Partners LP in 2010 for $1.6 billion to expand business.

Man Group announced in January a plan to trim costs by 10 percent by cutting pay and jobs.

Adjusted pretax profit in the nine months through December was $262 million compared with $599 million in the 12 months through March 2011. Man Group has changed its year-end reporting period to December.

Man Group’s share price rose almost 14 percent this year.

I'm not surprised Man Group's shares have risen this year after suffering last year. In the world of hedge funds, Man Group is an 800-pound gorilla (one the largest asset gatherers). While Clarke sees demand from Asia picking up, something I've touched on here and here, the key passage in the article that he sees the beginning of a "significant shift from bonds into equities and other strategies.”

A lot of investors caught off-guard by the latest rally are going to underperform in 2012. Take for example, U.S. homebuilders and financials which move in tandem. Take a look at the chart below showing the relative performance of S&P Homebuilders vs. S&P Financials over the last six months (click on image to enlarge):

As the fundamentals for housing improve along with the overall economy, the big banks and regional banks are also gaining. Investors who are underweight or short U.S. financials still don't get it. The banks are flush with cash, profiting off money for nothing and risk for free, and will now benefit from an improving economy and rising bonding yields (steeper yield curve good for banks).

JP Morgan Chase's announcement earlier this week that they will increase their dividend yield was music to investors' ears as they're hungry for yield. Other banks will follow. And while Paulson & Co. got out of banks at the worst possible time, other top hedge funds like Bridgewater, Moore, Caxton and Citadel all got in at the perfect time.

How do I know? Because I track their portfolios religiously and pay attention to where they're adding risk. I do not care what gurus are saying on CNBC or what doomsday scenarios blogs like Zero Hedge are warning of, I only care about what top hedge funds are are actually buying & selling in their portfolios.

For example, take a look at which institutions increased their holdings of Bank of America (BAC) in Q4. The image below shows you the top ten institutions with the largest percentage increase in Q4 2011 (click on image to enlarge):

I wrote about whether Bank of America is rotted to the core last August. Notice how Citadel, Bridgewater and the Canada Pension Plan Investment Board (CPPIB) all increased their stake in Q4? What you don't know is that Citadel also made a ton of money buying Lennar Corp (LEN) back in Q3 and so did other top hedge funds who bet on a recovery in homebuilders. (Interestingly, Citadel, SAC Capital and CPPIB increased their stakes in cyclical stocks like U.S. Steel (X) in Q4 2011).

Importantly, top funds were adding risk to their portfolio when everyone else was scared to death that Europe would implode.

Of course, you cannot just buy whatever top hedge funds are buying blindly (if you do, you'll get burned). They buy a lot of crap too, stuff I wouldn't touch with a ten foot pole and the data is lagged (comes out 45 days after end of quarter). They also throw curve balls out there, shorting stocks they're seemingly buying. Only a discerning eye can figure out what's worth buying or not and when to pull the trigger.

Below, Man Group Plc Chief Executive Officer Peter Clarke talks about the global hedge fund industry and Man's business strategy. Clarke also discusses investment opportunities in China and Europe. He speaks with Susan Li on Bloomberg Television's "First Up."

Listen carefully to his comments on alpha generation, capital protection, liquidity, which strategies are going to do well as risk appetite shifts, and how Man's clients invest through managed accounts to ensure transparency/liquidity to avoid any MF Global type fraud.