What is Man?

Metaphysically, he is "but a breath," according to the
writer of Psalms.

But Man is also a "global leader in the fast growing
alternative investments industry…Man offers funds of
funds, structured, style and single manager products."

The Man Group plc (London: EMG) oversees $43 billion of
hedge fund investments for various institutional clients
worldwide. As the largest publicly traded hedge fund
operator, Man’s share price trend might offer clues about
both the health of the hedge fund industry and the
approximate health of the stock market.

Lately, Man’s share price has been falling, which is
probably not a favorable omen.

200 years ago, the Man Group devoted itself to trading
agricultural commodities. But the Group sloughed off that
business in 2000 to focus on the oh-so-sexy business of
running hedge funds. However, Man doesn’t run just any old
sort of hedge fund, it operates the so-called fund of funds
that charge multiple layers of "management fees" and
"performance fees." A plain-vanilla hedge fund charges an
annual fee equal to 1% of the assets under management plus
20% of the profits. But a fund of funds might subject
clients to fees as high as 3% of the assets plus 30% of the
So far, such lavish fee structures do not seem to trouble
Man’s clients. Business has been booming. Why then has
Man’s stock been performing so dismally of late? Does it
"know" something that we don’t? Maybe the stock knows that
a few big hedge funds are in a lot of trouble. Is it a
coincidence, for example, that Man shares have dropped
about 20% since GM’s latest woes began surfacing in mid-
Or maybe Man shares are sensing that the entire universe of
8,500 hedge funds is in a little bit of trouble, due to the
fact that the number of funds is growing while the average
performance results are shrinking.
Hedge funds, on average, are down about 2% in 2005,
compared to a drop of about 4% for the S&P 500. This
uninspiring performance continues a multi-year trend of
yawn-inducing results. "Over the past four years," the Wall
Street Journal relates, "the average hedge fund gained 6.4%
annually, compared with an average annual gain of less than
2% for the S&P 500."

Even in the best of circumstances – like during a once-in-
a-lifetime hedge fund boom, for example – the shares of Man
Financial seemed like a dicey proposition to many savvy
investors known to your New York editor. "The stock is too
expensive," they complained. "Its business model relies
upon a top-heavy, Dr. Seuss-like fee structure that is
unlikely to survive a period of low returns." (But the
stock went up anyway).

Now that a sustained period of low returns has arrived,
Man’s clients may become a little less eager to pay bull-
market-style fees. In which case, today’s super-sized hedge
fund industry might begin to downsize.

Sadly, investment results among hedge funds are unlikely to
improve soon, according to J.P. Morgan analyst, Jan Loeys.
The spectacular growth of the hedge fund industry is making
it more difficult for funds to replicate the client-
pleasing results of past years.

"Hedge funds have become a dominant force in market
trading," Loeys notes. "As they grow larger, they will
eventually erode the same market opportunities and mis-
pricings they have relied on to create their superior
returns. Opportunities are disappearing fastest where hedge
funds are very active."

Imagine a backyard Easter egg hunt attended by a dozen kids
from the neighborhood. All the kids would finish the hunt
with some goodies in their bags and smiles on their faces.
But if the identical Easter egg hunt were attended by 8,500
kids, you’d be drying a lot of tears.

The hedge fund world is not so different. 8,500 hedge fund
managers are foraging in many of the same market sectors
for many of the same "goodies," and there are not always
enough to go around. Increasingly, therefore, smiles are
turning to frowns…and sometimes to tears.

But why should we care? What does it matter to us
individual investors if the world loses a few hedge funds?
Why should we be concerned that exotic car dealerships on
Park Avenue might sell fewer Aston Martins this year, or
that 5-star yoga retreats to India might not be as popular
as last year? Maybe we shouldn’t care at all.

On the other hand, Man’s share price trend might contain a
timely message for all of us. It might be saying that the
stock market is more likely to be a "sell" than a "buy"
over the coming months.

The "toppy" price chart of the Chicago Mercantile Exchange
(NYSE:CME) seems to be sending the same message. The
"MERC," as it is known, is the derivatives exchange that
trades many of the nation’s most actively traded financial
futures contracts. It is to financial futures what the NYSE
is to stocks. And in this age of hedge funds, futures and
stocks share a very intimate relationship. Neither could
flourish for long without the other. Therefore, it is no
accident, we think, that Man’s share price and CME are both
sliding south.

Unless and until either stock resumes its ascent, we would
be hesitant to "bet big" on U.S. stocks. In other words,
we’d rather be late to a party than early to a
funeral…especially our own.

Did You Notice…?
By Eric J. Fry
Once upon a time in America, its citizens worked hard,
saved their money and held mortgage-burning parties. Today
in America, its citizens continue to work hard. But they
burn through money and use "cash-out" mortgages to throw

Over the last two decades, as home prices have moved
inexorably higher, our personal savings have dwindled down
to zero. Fortunately, for the home-owning majority of
Americans, rising home prices have more than compensated
for a dearth of savings. Our houses have done our saving
for us.
But if home prices and/or stock prices were to begin
heading down – instead of the officially sanctioned
direction: Up – our growing, consumption-driven U.S.
economy might become a slowing, debt-constrained economy.

And the Markets…



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