05/10/2011 Author: Tony Griffiths

Summer of discontent

Man Group’s recently released second-quarter performance figures, showing a dramatic drop in AUM and significant redemptions, may be bad news for the recently merged hedge fund manager, but many see the results as par for the course in a turbulent year, and a sign of the growing maturity of the post-2008 hedge fund investor

In a year characterised by unwelcome surprises, the release this week of Man Group’s gloomy H1 trading statement, detailing a shock $6bn drop in assets for the second quarter, was remarkably on-trend. Markets lurched, headlines rumbled, and analysts and managers alike ate humble pie.        

As tough as the summer slog has been, expectations were that the listed giant – still adjusting to life following last year’s GLG merger – would creak, but not stumble, with outflows matched by respectable performance at its systematic AHL fund.    

“We were neutral but wanted to be more positive,” one analyst told HFMWeek. “We expected assets to stagnate around $70bn-$71bn. That they should fall to $65bn caught everyone out.”  

Man’s 8.5% fall in AuM, down from $71bn at 30 June 2011, resulted in an eye-watering drop of almost 25% in the firm’s share price at one point in next day trading. One piece of information that many detractors latched onto was outflows. Sales of $4.5bn were wiped out by redemptions totalling $7.1bn, resulting in net outflows for the quarter of $2.6bn.   

“As anticipated, investor sentiment continued to weaken across the summer with lower sales in our second quarter and some increase in redemption rates, notably in September,” explained Peter Clarke, Man’s CEO, in the firm’s release.

GLG appears to be the culprit, with the majority of the $2.6bn total coming from GLG-branded long-only funds and open-ended alternatives. “We would have expected a re-adjustment in guaranteed products,” said the analyst, “but the more worrying aspect has been the performance and redemptions at GLG. Performance is worse than expected and redemptions are much worse, especially at the end of the quarter in the firm’s Ucits funds.”

Outflows from GLG alternatives ($1.5bn) were primarily from a small number of investors in equity hedge and emerging markets strategies, Man said. Long-only redemptions ($1bn) came mainly in GLG global convertibles and Japan strategies.Encouragingly for hedge funds then, a significant chunk of the outflows appear to have come from the retail sector.

“We knew, pre-August, that some products at Man/GLG were in line for redemptions and that’s true of the industry as a whole,” one senior prime brokerage professional told HFMWeek. “But we’re not expecting to see massive redemptions. Having talked to investors recently, they’re not getting selling pressure from their underlying investors. Administrators aren’t seeing significant redemptions either.” It hasn’t been that August has precipitated matters, they add, more that it’s been “the final conviction” for what’s already being processed.

In Deutsche Bank’s August monthly update, 83% of investors said that they didn’t intend to increase redemption requests. “What investors also said was that hedge fund managers have become a lot better at communicating with investors and pro-actively explaining the reasons for performance,” says Anita Nemes, the bank’s global head of capital introductions.

“As the composition of the investor universe has changed, investors are more long term and more knowledgeable than they were,” she adds. “I think in 2008 there were some unrealistic expectations from investors, there was also some disappointing behaviour from some managers but both managers and investors have learnt a lot from 2008.”  
Another prime brokerage professional, who preferred to remain anonymous, told HFMWeek that during a conference call last week investors had said they weren’t redeeming any more than normal. One, a pensions consultant, said their clients were looking at hedge fund performance, and then at equities and market conditions, and admitting it compares nicely.

And as for Man Group itself? Analysts remain largely neutral. “We expect the firm to see net outflows for the rest of the year,” one cautiously predicts, “but not to the extent seen at the end of the last quarter.” Managers with an institutional investor base will be confident of seeing similar.