Man Group revamps flagship fund AHL

LONDON (Reuters) - Man Group (EMG.L) is trying to improve the way its flagship fund AHL, one of the world's biggest hedge funds, copes in choppy markets with measures it says would have cut last year's damaging losses by half.

Tim Wong, chief executive of AHL, told Reuters that the $21.1 billion (13.9 billion pounds) computer-driven fund has brought in new programs to limit losses and is cutting its reliance on its traditional strategy of following market momentum.

The changes -- which also include diversification into India and China as well as individual stocks -- have been implemented after AHL suffered its worst calendar year of performance in 2009 with losses of nearly 17 percent.

That underperformed an average 6.57 percent loss among other managed futures funds -- hedge funds that bet on global futures markets -- according to Credit Suisse/Tremont, and came as the rest of the industry, and the stock market, was booming.

The changes to limit losses in see-sawing markets could have halved last year's losses at the "black-box" fund, named after 1980s founders Michael Adam, David Harding and Martin Lueck, said Wong.

"The new models may improve performance by a few percentage points per year," he said in an interview at Man's offices at Sugar Quay, beside the river Thames, reflecting the firm's 18th century origins making sugar barrels.

"In 2009 it might have reduced drawdown by almost half, although in 2008 (AHL) probably would not have made as much money ... This year, overall portfolio performance has been marginally better than without those."

While returns are marginally positive this year, AHL has nevertheless been a drag on Man itself, which on Thursday reported a seventh consecutive quarter of investor withdrawals.

"There hasn't really been any pressure (from senior management)," said Wong. "Clearly we've all been concerned about performance. There are some new investors coming in, and clearly better performance will help that even further."

Man has sought to reduce its reliance on AHL through the proposed acquisition of rival GLG GLG.N, whose star manager culture contrasts sharply with Man's approach.

REVAMP

The changes -- which Man insists have been in the pipeline for years -- include programs designed to stop AHL's assets being eaten away in range-bound markets, which were brought in in December and which may be useful if markets stay as volatile as they have been in recent months.

Managed futures funds tend to do well out of long-lasting market trends, but can be hurt when they try to jump onto market moves, only to see prices quickly go the other way.

Last year, despite an equity bull market that began in March and ran into this year, AHL lost out in markets such as bonds and energy.

"During periods of range-bound markets our systems are much less likely to get caught up," said portfolio manager Harry Skaliotis.

Wong said AHL had also upgraded its operating system -- the equivalent of moving to a newer version of Microsoft Windows -- allowing it to combine the different algorithms AHL uses and implement new algorithms more quickly.

AHL is also cutting reliance on simply following up on downtrends in markets in favour of programs that look at a security's fundamentals or track a security that moves away from its historical average price.

"We've added more fundamental predictors and we've looked at mean reversions. This will diversify it from its main trend following approach, although it's still a minority," said Wong.

Currently 90 percent of AHL is focussed on betting on momentum in futures markets, a strategy that can work well if markets decisively change direction but which can get caught out when markets go up and down many times within a narrow range.

"Non-momentum (strategies) may increase, it may go to 80-20." Will it fall further? "It depends on how the market evolves," said Wong.

TOO BIG?

Wong also denied suggestions that AHL's size hindered its ability to make money by limiting which markets it could enter.

The firm has in previous years had to delay product launches linked to the fund because AHL had hit its immediate capacity.

"I've always believed size is more of an industry problem than a single manager problem," said Wong.

"So far size hasn't really been affecting our performance... In certain small commodities it negatively affects performance, but in some it's positive."

However, he admits the need to diversify. The fund has begun trading equity and commodity futures in India and may do so in China as well.

And it also plans to start trading baskets of individual stocks, rather than index futures, later this year to give it access to more price movements.

The fund could combine this with its own analysis that could, for example, mean that if its algorithms tell it to buy bank stocks, it may buy those with the best earnings.

(Editing by Jon Loades-Carter)