What does the "manual" position of the Honeywell 4000 4850 001 zone valve do?

Does it by pass the thermostat and not operate the valve so that the valve stays closed all the time?

It does the opposite: In the manual position the valve will stay open regardless of the thermostat. If you want to shut off the zone, there is probably a twist valve (like on a hose spigot) somewhere in the return tube before the zone valve.. Be sure you turn off the right valve. I am not a pro, so you may get a better answer.