Hedge funds are supposed to like risk and to love leverage. However, in the current markets, it has all got too much for Man Group.

The world’s biggest quoted hedge fund manager – and historically one of the most successful – shocked investors yesterday by announcing plans to unwind all the leverage in its $8.6 billion (£5.5 billion) Man Global Strategies fund. It also surprised shareholders by a sharper than expected fall in assets under management which slipped to $67.6 billion, compared with a forecast $70.3 billion.

That was enough to knock almost a third off its share price.

Many hedge funds are being forced to cut leverage by their lenders, but in Man’s case the move is voluntary. Because markets are so difficult, it has decided to pay back its lenders and put MGS’s holdings in cash.

This will cut the size of MGS, which gives exposure to between 40 and 50 single-manager hedge funds, to about $1 billion by the end of the year. It will also remove a big incentive for investors to stay.

Man sells the fund to well-heeled individuals and some institutional investors, who expect sexy returns. Man will offer these investors the option of transferring into its AHL managed futures fund, which remains up for the year so far. Some, though, are likely to look for more excitement elsewhere.

Risking departures in this way is a bold move when the entire hedge fund industry is facing mass redemption calls.

Degearing the fund will cut management and performance fees. Man accelerated a $107 million related accounting charge as a result of this yesterday.

Man insists that it has taken the sensible route with a particular fund and will not try to derisk any of its other portfolios.

MGS mainly invests in start-up and early-stage companies, which are highly vulnerable to recession. Investors have their capital in the fund guaranteed and will lose nothing by staying.

Man also maintains that it will consider gearing up the fund again, once markets become more predictable. But by then it may be too late and the investors long gone.

Leading prime brokers expect the industry to shrink by half and for fees to come under intense pressure. Although most of the casualties will be among smaller funds, Man’s experience suggests that life is going to be tough even for the biggest.

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