May 1, 2012

Man Group Reports $1 Billion in Outflows

Net cash falls, spurring concern over spending

The largest publicly traded hedge fund manager in the world, Man Group, saw net outflows of $1 billion in Q1 and reported a net drop in cash that made analysts wonder if it is spending too much.

Bloomberg reported Tuesday that the company reported sales of $3.1 billion, countered by client outflows of $4.1 billion from its investment funds. It also said its net cash had fallen by 58% to $250 million in the same quarter as expenses such as employee bonuses devoured more funds than analysts had anticipated.

In an analyst call, Finance Director Kevin Hayes said that staff bonuses, taxes and loans to some of Man Group’s funds accounted for the lower cash reserve. Analysts have lowered estimates for fee revenue for the company after its largest hedge fund, the $19.5 billion AHL computerized trading system, fell about 2.1% so far this year after losing 6% in 2011.

RBC Capital Markets analyst Peter Lenardos said in the report, “The surprise to me was how low the net cash position was. Man will pay an uncovered dividend this year, so the balance sheet could get weaker.”

While the company’s GLG unit saw gains in assets under management from $58.4 billion to $59 billion as stock markets rose in Q1, the company’s stock fell last week to its lowest level in 11 years; currently it is trading at a 35% discount to asset value minus liabilities.

The falling stock price has contributed to making Man a target for a takeover, according to the UBS AG analyst Arnaud Giblat in a recent report, with attractions for potential buyers that include its distribution network in Asia and hedge-fund fees that are generally higher than those on mutual funds.

However, CEO Peter Clarke was quoted in the report saying, “We don’t feel that we need a big brother” to achieve strategic goals, and refusing to comment on any speculation about possible takeovers.

Man Group has been the worst-performing member of the U.K. benchmark FTSE 100 Index over the past year. In addition, last month Moody’s Investors Service, which has rated Man Group with its second-lowest investment grade, said it was reviewing the company’s debt for a possible downgrade. Moody’s cited declining AUM, dropping sales, lower profit margins on GLG products versus AHL and continuing underperformance for the company’s hedge funds. It also questioned whether “high fees” charged by hedge funds were sustainable. While most hedge funds charge investors a 2% management fee and take 20% of profits, Man Group charges its AHL investors 3% to manage assets and takes 20% of profits.

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