Hedgie fee model is not fit for such volatile times

THE reaction to yesterday’s Man Group statement was a tad overdone. Prior to the announcement, its market cap was £5.7bn, roughly eight per cent of its £71bn of assets under management (last stated at the end of June).

Following the revelation that assets under management had fallen to £65bn, its market cap plunged to £4.5bn, roughly seven per cent of AUM. Assets fell by 8.5 per cent – but the stock lost nearly 25 per cent. Why did investors overreact?

Firstly, the numbers raised concerns over Man’s $1.6bn acquisition of GLG last year. The funds it picked up as part of that deal performed poorly: GLG alternatives was down by $1.1bn in the second quarter, while the long-only fund lost $1.9bn.

Conversely, AHL, Man’s flagship fund, added $1.5bn during the three month period. The GLG funds are managed by humans while AHL is a quant fund, which uses complex algorithms to beat markets. In the battle of man vs machine, the computers have come out on top.

Worse still, some investors are beginning to question the viability of the hedge fund fee model in these extremely volatile times.

If a client had put $1m into the GLG Long-Short fund in June, they would have made $5,000 by the end of August. But they would have had to pay a two per cent management fee on the entire $1m as well as a 20 per cent performance fee on the profits: the total cost would be $21,000 – wiping out the small gain.

Although they would have lost more in an S&P tracker, there were other asset classes – such as gold and Treasuries – that would have been a better bet. No wonder clients pulled a net $2.6bn out of Man’s funds during the second quarter.

david.crow@cityam.com