Man heightens hedge fund fears

Flagship fund losses fuel fears for smaller players. Bolton warns correction could take months

Man Group, the world's largest quoted hedge fund manager, fuelled fears yesterday that some of its smaller competitors may be in serious trouble after revealing that some of its futures funds have made substantial losses this month.

The disclosure prompted speculation in the market that some smaller hedge funds may be suffering even greater losses and could be forced to unwind highly leveraged positions, causing share prices to spiral lower.

The news came as the FTSE 100 dropped another 91.6 points, closing down 1.6 per cent and reversing more than half the gains it made on Tuesday after Monday's plunge in shares.

Anthony Bolton, Fidelity's highly respected fund manager, yesterday warned the stock market "correction could take months rather days". Speaking at the Securities and Investment Institute Mr Bolton said: "I think it could be the end of the bull market".

Man Group confirmed that its flagship Man AHL Diversified Futures fund lost 3.7 per cent last week alone, and had dropped4.5 per cent so far this month. However, it is still showing a net gain of 31.9 per cent in the year so far. Shares in Man Group, one of the best blue-chip performers this year, closed at 2,195p, a fall of 16p.

A hedge fund analyst, who declined to be named, said Man's poor performance should be viewed as a short-term movement due to volatile equity markets, but also warned investors to expect a bumpy ride over the summer. "This is a managed futures fund, and this sort of fall, while it does not happen every week, does happen from time to time. The AHL fund has certainly seen fluctuations like this before but the market has clearly absorbed this news pretty well," he said.

Man's statement came as rumours swept the market that one unnamed hedge fund was nearly forced into liquidation yesterday after a bet on Equator Exploration, a small oil exploration and production company with assets in West Africa, went badly wrong. The fund was thought to have been forced into dumping its stake in the company, sending the price tumbling 33 per cent to 132p. Traders said the situation highlights the dangers of smaller hedge funds taking big bets on illiquid stocks.

Many hedge funds have been betting huge sums on a complex commodity and currency strategy, involving short selling the dollar while at the same time buying gold and platinum using borrowed yen. Any funds in these positions in the last two weeks will have sustained heavy losses as commodity prices have tumbled and the dollarstrengthened.

Rumours of a smaller hedge fund in deep financial trouble have accelerated as global markets have suffered their biggest falls in more than three years. Emerging markets have been the worst hit, although London , with its heavy weighting in commodity-based stocks, has been the worst-affected major market.

A failing hedge fund is likely to create a distressed selling situation when a fund is forced to sell stock into a falling market because it is in danger of breaching its financial obligations. Most hedge funds borrow a large proportion of the money that they invest, using their existing capital as collateral against borrowed funds. When markets move substantially against these positions they have taken, a fund may need to sell assets to cover margin calls, like when the hedge fund Long-Term Capital Management collapsed in 1998, causing weakness across global equity markets.

Market-makers also blamed Sets, the electronic trading platform used in London, for the increased volatility seen in recent years. In the past, when market prices were created by a quote-driven competing market-maker system, prices could be "held up" in the face of strong selling pressure. That is no longer possible, as the electronic system executes trades without any human interference.