LONDON (HedgeWorld.com)–The increased volatility of financial markets in recent weeks is the direct result of underlying fundamentals in the global financial system, according to Stanley Fink, chief executive of Man Group, the world’s biggest operator of hedge funds.
“The market volatility has caught up with some of the fundamentals,” Mr. Fink said at a Reuters Newsmaker event held here June 13. “The volatility is normal for this type of market. People have too long believed that central banks could protect them from the imbalances in the world economy.” Reuters is the parent company of Lipper HedgeWorld.
He said hedge funds added value to public markets. “As the executive director of a public company I have found that some of the earliest and most persistent prodders are hedge funds,” Mr. Fink said, citing the pressure put on Man Group before it spun off its sugar trading business and the current calls it is facing to sell its broking arm.
But Mr. Fink acknowledged that the usefulness of hedge funds has limits. “If hedge funds dominate a sector, like they did with convertible arbitrage, it is negative,” he said. He also noted that some hedge funds had become less innovative owing to the length of the previous market upturn. “A long-term bull market brings up the risk that hedge funds think leveraged beta is skill,” he said.
Mr. Fink also expressed some unease about the rapid uptake in commodity instruments by absolute return investors. “It is unhealthy for hedge funds. If they are too big or they all use the same strategy, it will become a problem,” he said. Commenting on the possible causes of a shakeout in the booming commodities market, Mr Fink added: “It will take a mixture of events plus overcrowding.”
On Man Group’s own pension fund arrangements, he said the division of assets was 30% to 40% bonds, 40% to 50% equities and 10% hedge funds, mainly in funds of funds. “We haven’t bought into private equity. We think it is over-hyped,” he said.
Mr. Fink discussed Man’s two-pronged strategy on the environment. The group is moving towards becoming carbon neutral in its operations and is planning to fund a variety of alternative energy investments. “The science of climate change is pretty dramatic as Mr. (Al) Gore points out, but the way he goes about it doesn’t make many converts,” he said.
Unlike some investment practitioners, Mr. Fink said that long-only funds will survive, but noted that hedge funds offer greater clarity. “The implication for the long-only industry is to focus on alpha and beta as different skills,” he said, adding that long funds will move closer to absolute return vehicles by using limited leverage and short selling. “In 10 years’ time there will be more a blurring (between long-only and hedge funds).”
The rapid growth in hedge fund assets, Mr. Fink said, had brought about a conundrum for some managers: As their funds grow, their investment strategy becomes more conservative. He said this trend had applied to leverage. “The use of leverage is significantly down on normal (levels) and certainly from the peak.”
Man Group published its fiscal 2006 annual report showing that Mr. Fink received remuneration of ?? 1/2 6 million, up 57% from the previous year. Man’s shares are up about 60% from a year ago, but at ?? 1/2 22.85 are down 18% from the all-time high recorded in May. The report said Mr. Fink owned shares at March 31 worth around ?? 1/2 98 million and also announced a 6-for-1 share split.
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