Struggling Hedge Fund Under a Cloud

Date: Wednesday, May 2, 2012
Author: Azam Ahmed and Mark Scott

The Man Group, a London institution known for its computer-driven trading and famed literary prize, has taken a pounding in the eyes of investors and clients, raising questions about whether the $59 billion firm could be the object of a takeover.

The firm, the world’s largest publicly traded hedge fund, has suffered a crumbling stock price and poor market performance. On Tuesday, the Man Group reported more bad news — more than $1 billion in client money left its funds during the first quarter of the year.

As the hedge fund industry continues to grow and expand, the Man Group has struggled to keep pace. Even when the firm has good news to share, like a new partnership with Oxford University announced last week, it is overshadowed by irrepressibly negative market sentiment.

As a result, the firm has been bleeding assets. It now manages significantly less money than it did before merging with GLG, another multibillion-dollar hedge fund, in 2010.

Moody’s Investors Service recently put the hedge fund manager on watch for a possible downgrade. And a research report on the beleaguered firm issued Tuesday by analysts at Investec Securities was titled simply, “Where’s the love gone?”

Driving the assault is poor performance. The firm’s flagship product, AHL, a fund that uses a proprietary computer-driven strategy, lost nearly 6 percent last year. So far this year, the AHL fund is down about 2 percent, and remains on average about 14 percent under the level it needs to hit before it can charge the lucrative performance fees.

GLG, meanwhile, has fared far better in 2012, but not enough to make up for Man’s losses. Since merging with GLG, the combined Man Group assets have plummeted to levels beneath its premerger days. In early 2007, before adding on nearly $24 billion in GLG assets to its holdings, Man had more than $70 billion all by itself.

What is distinct about the Man Group is that it is publicly traded, a relatively rare phenomenon in the hedge fund sector. While most hedge funds have only their investors to answer to, the Man Group must also serve shareholders. And displeasure with the status of the hedge fund can be expressed in a public way — the stock price — making the company vulnerable to short-term losses.

Man’s share price fell more than 5 percent Tuesday to just under £1, bringing the market capitalization of the company to £1.8 billion ($2.9 billion). In the last year, the Man Group — the sponsor of the coveted Man Booker Prize for literature — has been the worst-performing stock in the FTSE 100, reaching an 11-year low last week, prompting speculation it could be a takeover target for a buyer looking to pick up an asset management firm on the cheap.

The Man Group’s chief executive, Peter Clarke, tried to stamp out such speculation on Tuesday.

“We don’t feel we need a big brother in order to achieve our strategic objectives,” he told reporters during a conference call.

But Mr. Clarke, who received $7 million in pay for the year, faced attacks of his own during a shareholder meeting on Tuesday.

Angry investors expressed their frustration with the firm and Mr. Clarke. According to a person in attendance at the meeting, one investor pointedly asked: “Does it really feel like a $7 million sort of year to you?”

The Man Group’s problems are a cautionary tale for others in the industry, and other hedge funds have also suffered after going public, including Och-Ziff Capital Management and the Fortress Investment Group. Och-Ziff is currently trading at less than a third of its initial public offering price. Fortress, which was trading in early 2007 at about $31 a share, closed Tuesday at $3.73.

“In publicly traded entities, people do seem to look for short-term performance,” said Stephen J. Brown, a professor at the Stern Business School at New York University. “The market has very clearly shown its disapproval of what is happening at the Man Group.”

Along with assets, revenue and profits have fallen drastically since 2008. In 2008, Man Group was pulling in about $3.2 billion of revenue and about $1.7 billion in net income. By 2011, revenue sank to $1.6 billion and profit was down to $211 million.

To try to counteract the drop-off, the Man Group has focused on raising new money. Its marketing team has been a force in the world of hedge fund sales focused on raising the firm’s profile in the United States, where it has been historically weak raising assets. Even with the firm’s dour results, it managed to raise more than $3.1 billion in new money in the first quarter (even as the firm watched $4.1 billion in investor money leave.)

For its AHL fund, the Man Group charges up to a 3 percent management fee and a 20 percent performance fee, higher than industry norms of 2 percent in fees and 20 percent in performance.

By contrast, Winton Capital Management, another computer-driven trading shop, has flourished. Founded by one of the original scientists behind AHL, David Harding, Winton’s assets have swelled to nearly $30 billion. The firm charges management fees of 1 percent and performance fees of closer to 20 percent.

If there is a silver lining in the fallout from Man’s devastating year, it is that financial analysts are largely placing buy ratings on the firm’s stock, convinced that the company is worth more than the share price reflects. Man’s products and distribution channels for retail customers, particularly in Asia, could also be a major draw for a purchaser.

“Growing such exposure organically has proved extremely difficult and costly for many asset managers,” according to a note last week from a UBS analyst, Arnaud Giblat, which helped set off a round of chatter about a possible takeover.