Man's $33 Billion Manager Resists Urge to Buy the Dip

(Bloomberg) -- Pierre-Henri Flamand, the chief investment officer of Man Group Plc’s GLG unit, said market swings could continue and warned against a tendency to “buy the dip” after a correction in global markets.

“The instinctive inclination to ‘buy the dip’ may be strong,” Flamand said in an emailed response to questions from Bloomberg. “As the past week has shown, this may not work so well. Indeed, I think what we have seen in the past week could continue for some time.”

The CBOE Volatility Index had its biggest single-day jump on Feb. 5 as inflation worries led to a spike in bond yields and a plunge in global stocks. Investors buying up securities after the tumble were hit when the S&P 500 Index resumed the decline later in the week, ending the five-day period down 5.2 percent. The speed of the reversal has challenged the oft-repeated maxim that investors should buy after a decline as market signals are increasingly difficult to parse.

GLG is a unit of Man Group, the world’s largest publicly traded hedge fund unit. Man itself wasn’t immune to turmoil from the market selloff as one of its main hedge funds fell about 4.6 percent on Feb. 5. Many of GLG’s strategies have taken defensive positions recently, Flamand said, declining to comment on the performance of specific funds. GLG oversaw $32.9 billion globally in hedge funds and long-only strategies as of September, according to its website.

Active strategies, particularly those combining market-neutral and factor-neutral strategies, will be one of the best ways to hedge against a downturn, he wrote in the email. Market-neutral strategies attempt to avoid market risks, often by matching bullish and bearish bets. Factor neutral strategies seek to weigh factors such as market exposure, company size, value and stage of growth. Richly valued markets such as technology stocks could be the hardest hit in the downturn, Flamand said.

Seeds were being sown for "a particularly vicious correction," Flamand said in a January commentary before the market rout. At the time, he said the market appeared to be moving into the fifth stage of Ralph Nelson Elliott’s wave model of technical analysis of market trends, in which everyone stands firmly behind positive news.

“The current period of stability has overtaken 1965, and only once since 1920-1995 has the market enjoyed a longer run without a 5 percent fall,” he wrote in the commentary. “While the fifth wave can last for weeks, months or even years, it inevitably prefaces a significant market correction, on average giving up between 38 percent and 50 percent of all gains.”

It is not uncommon to have quite large corrections within the fifth wave of the cycle, Flamand wrote in the email, adding he isn’t convinced the markets are at the start of "a decisive turn downwards."

Flamand is looking for signs that the market correction will spread to different asset classes, such as credit, rather than being limited to equities. He said it’s always difficult to know with certainty what causes a correction. One trigger could be an increase in bond yields caused by rising inflation, making it harder to investors to find havens other than cash, he said.

Flamand joined GLG in June 2014, after shutting his own Edoma Capital Partners, a European hedge fund focused on companies going through mergers and reorganizations. He had spent 15 years with Goldman Sachs Group Inc., rising to lead the internal hedge fund, Principal Strategies Group.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Neil Callanan at ncallanan@bloomberg.net.

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