Man Group sees assets decline to USD61bn as managers cut investment exposure

Date: Friday, November 7, 2008
Author: Hedgeweek.com

Man Group, probably the world's largest hedge fund manager, saw assets under management fall 9 per cent to USD67.6bn over the six months to the end of September, including a decline of USD2.7bn as a result of "extreme moves" in securities and foreign exchange markets in the last week of the month, according to the group's half-yearly trading statement.

Man recorded net inflows of USD4.2bn over the first half of its financial year, up 17 per cent compared with the same period of 2007, thanks to a 28 per cent increase in sales to USD10.2bn, of which private investors accounted for 70 per cent and institutions only 30 per cent, and redemptions "significantly lower than the industry average" at USD6.0bn.

In view of the level of market volatility, active risk management has reduced investment exposure in products run by Man Global Strategies, one of group's core investment managers. This de-gearing, combined with adverse foreign exchange movements equivalent to some USD3bn, have further reduced estimated assets under management to about USD61bn at the beginning of November.

"The period under review witnessed unprecedented levels of turmoil in financial markets, with turbulence moving globally through credit, equity, commodity and more recently currency markets," says Man Group chief executive Peter Clarke.

"Against this backdrop of extreme volatility, Man has delivered robust results overall, as a result of its broad geography of asset-raising, wide product range and capital strength. While market conditions remain challenging, Man has adapted quickly, and our continued sales momentum and financial strength are likely to reinforce our leading position in the industry."

Profit before tax half-year was USD622m, down 24 per cent from the comparable period, primarily reflecting a reduction in performance fee income and the accelerated amortisation of Man Global Strategies upfront sales commissions.

Excluding the effect of the amortisation, profit before tax was down 14 per cent to USD708m, comprising net management fee income of USD549m (up 2 per cent from a year earlier) and net performance fee income of USD159m (down 44 per cent). The results and the difficult market outlook spooked investors, who sold Man Group's shares down 32 per cent to 266.75 pence on the London Stock Exchange in late trading on Thursday.

Within the overall decline in assets during the six months to September, USD5.9bn was attributed to market performance, USD2.7bn to the impact of a stronger US dollar on the values of funds denominated in other currencies, and USD2.6 to the reduction in investment exposure in Man Global Strategies products.

The group says the bulk of its assets have performed well given the market conditions, especially those managed by AHL and RMF, which delivered returns in line with or ahead of industry benchmarks. Glenwood performance was slightly below benchmark returns, but Man Global Strategies, which specialises in more concentrated portfolios combining a mix of early-stage and developing managers targeting higher returns and volatility, was particularly badly affected, dropping by around 20 per cent over the first nine months of this year.

Man says that since the end of September, the MGS investment committee has implemented a further reduction in investment exposure to reduce risk, which will lead to a further decrease in funds under management during the next two months of approximately USD7.5bn, including USD4bn expected during November and December.

The firm says AHL, a managed futures strategy, gained 12 per cent in October, while RMF and Glenwood have seen experienced estimated losses of between 3 and 4 per cent. At the end of October AHL was, on a weighted average funds under management basis, only 2 per cent away from net asset value highs, but all its other managers are significantly below high water marks.

As a result, any performance fee earnings in the second half of the financial year are expected to be earned by any material upward move in AHL. "Performance fees from our other managers in the period are very unlikely," the firm says.

The trading statement concludes: "Continued uncertainty in markets creates a difficult sales environment and challenges performance across the industry. Pressure on the capital base of many financial institutions will reduce their ability to allocate assets to the industry for investment in the near term.

"The limited availability of leverage and more stringent terms for lending will continue to hamper the industry. While we are not immune to these industry-wide factors, our capital, scale and strong banking relationships continue to secure us favourable access to financing. Our ability to offer a full range of low leverage products, with guarantees for those who want capital protection, and open-ended investments for those who want frequent liquidity, will allow us to continue to meet investor demand as markets begin to stabilise and significant investment opportunities are likely to emerge.

"An increased regulatory focus on financial businesses and markets is likely given recent turmoil. Man has long operated in highly regulated private investor markets, and we have the capital, resources and structure to address the evolving requirements.

"It is clear that the industry will see a significant reduction in both the number of participants and the level of funds under management in the near term. In the medium term, the value of well-resourced, institutional quality firms will become evident. Man is well positioned as a leader in a world of tighter regulation, scarce funding and higher barriers to entry."