Man under pressure

Hedge fund manager Man Group released a troubled trading update last month. As at end-September, total funds under management had slipped 10 per cent year on year to $39.5bn (£25bn). But falling funds managed mean falling management fees and, in 2009-10, Man's management fee income had already dropped 31 per cent to $1.29bn. Performance fees have also suffered because of poor fund performance, mainly during 2009. First-half performance fees for 2010-11 are expected to be just $10m, compared with last year's $43m. Accordingly, management expect first-half profits to be around $215m, well down on the $268m delivered the previous first half.

Admittedly, fund performance is improving. Man's structured product range, for instance, is doing well with its IP220 fund having risen 12.3 per cent in the year to end August, while Man's flagship AHL fund, comprising 55 per cent of total funds managed, was up 5.3 per cent in that period. Although management says that AHL is still "largely below high water marks", suggesting that the fund isn't quite generating performance fees again.

Even that improving trend could falter. Hedge funds thrive on volatility as investors seek cover in difficult times through funds that aim to deliver absolute returns. At the height of the financial crisis in September 2008, for instance, Man reported robust demand for its products, with sales up 25 per cent year on year. Although the bull market in equities that began in March 2009 has stalled, with the prospect of a double-dip recession receding, financial markets are hardly in turmoil either. Essentially, conditions look a little too calm for hedge funds to thrive.

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Moreover, the possibility of more quantitative easing (QE) - the purchase of financial assets by central banks to boost liquidity - could yet mean trouble for Man. Earlier this month, Chancellor George Osborne appeared to back a further round of QE, while similar schemes are in place internationally. But Man's management says that QE was a key reason for AHL's poor performance during 2009. Analysts at broker Numis Securities think that QE distorts asset price trends - bad news for funds such as AHL that rely on exploiting trends. The broker estimates that about 46 per cent of the AHL fund is exposed to assets that are sensitive to QE. "If further QE is announced, it is possible that this recent [improved] fund performance may be short lived," notes the broker.

That said, Man's $1.6bn acquisition this month of rival US firm GLG Partners will create a group with total funds under management of about $63bn. It also looks like a smart long-term move. “The combined Man/GLG could become one of the most powerful forces in terms of both product and distribution in the alternative spaces," say analysts at Numis. That deal has, however, helped consume Man's cash pile. Numis estimates that Man's $1.7bn of net cash at end-March 2010 will fall to $362m by end-March 2011. Numis also expects Man's dividend to halve this year, although a prospective dividend yield of over 5 per cent remains attractive.