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SCMP Reporter

DURING HIS WORKING week, John Vlasto figures out how Man Investment Products can see climbing returns from hedge funds without taking undue risks.

When he gets some time off he likes nothing better than moving upwards without taking undue risks - as a mountaineer.

'I've a proven track record. I'm not dead yet,' joked the Briton, who spent four years scaling peaks around the world after he left the army.

These days his family and work commitments as Man's risk manager have caused him to scale down his climbing career to a hobby.

Man, meanwhile, has given him a tough mountain to face. Mr Vlasto is trying to produce the first systematic way of measuring and controlling risk across a variety of hedge fund strategies.

While risk controls for standard investments are old news, for hedge funds it is a whole new ball game.

'That is what is at the cutting edge of what is possible at the moment,' said Mr Vlasto.

It is no academic pursuit either. Big institutions are increasingly turning to once-frowned-upon hedge funds to diversify their portfolios. By taking long and short positions, hedge funds can make returns even when an overall market is heading south.

But institutional managers need reassurance about how much risk they are exposing their clients to before they will take the plunge into what are also called alternative investments.

'Hedge funds have a reputation for being risky investments,' said Mr Vlasto. 'Of course that is not necessarily true at all. Any institution that is thinking of investing in hedge funds is in my experience very interested in risk management.

'I'm sure that one of the core reasons that we have a long track record and a lot of assets under management is that risk management has always been core to our process of the way we run our businesses.'

Not that Man's hedge fund managers based in offices from Chicago to Paris are getting away with murder. They have to be actively involved in keeping risks under control themselves.

'For the hedge funds to date we have been managing the risk, by very intensive individual monitoring of the managers,' said Mr Vlasto. 'But we anticipate our allocation to the hedge funds is going to grow very significantly going forward. So we are proactively putting in place a similar systematic approach.'

Underlying the whole approach is a simple truth. A fund manager can never predict with any certainty how his returns will come out. But what he can do is control volatility, that is the extent of upswings and downswings of his fund.

'You can't really effectively target return in our opinion, whereas demonstrably you can target risk.'

That is something London-based Man, ranked 110 in the FTSE 350 index, has proved with its AHL Diversified Futures fund, the only hedge fund that is authorised for sale to the Hong Kong public. Over a 10-year period a chart of the rolling 12-month volatility of the fund has stuck to a tight range between 10 and 20 per cent. But the return of the fund has varied far more widely.

AHL Diversified Futures is actually managed by a computer program which is designed to spot trends in as many as 100 different futures markets around the globe and jump aboard until the trend breaks down.

The strategy has produced a return of 48.9 per cent between its inception in Hong Kong in May 1998 and the end of last year. If the program detects increasing volatility in the markets it operates in, it starts closing out its positions to protect itself.

It is that kind of consistency of risk which Mr Vlasto wants to see applied across other hedge fund strategies which are operated by Man's human managers.

Part of a trial he is running for his risk control system will recreate the scenario where the near collapse of the giant LTCM hedge funds rolled world markets three years ago.

'You say what happens if 1998 happens again to our current portfolio, what loss do we suffer? If it is too big a number we do something about our current portfolio,' said Mr Vlasto.

One of the keys to success is getting individual managers on side and co-operating.

'What we are trying to do here is come up with better products for our clients. The better the products, the more money we are going to raise and the more money the traders are going to have. So they are very much on the same side.'

Man, formerly known as ED & F Man, is hoping that more of its hedge fund products will be authorised by the Securities and Futures Commission. Having a sophisticated risk control system can only help.

Among the strategies are convertible bond arbitrage, market neutral, merger arbitrage and relative value arbitrage investing. Each carries different types of risks which Mr Vlasto has to measure as systematically as he can.

'It is a very good way of getting an overview of all the strategies that are out there and learning what all the traders are doing,' he said.

John Vlasto

1984:

Graduated with a bachelors degree in  philosophy and mathematics from Bristol  University.

1986:

Joined the British army as a lieutenant in  the Royal Signals.

1990:

Travelled the world rock climbing.

1994:

Developed equity derivative products for  Flemings in London.

1999:

Joined Man Investment Products devel oping hedge funds.

2001:

Became risk manager for Man Invest ment Products.



Uphill battle for Man's man