Man Group Rides the Hedge Fund Wave from Trough to Crest

(Bloomberg Gadfly) -- Hedge funds regained their mojo last year, with Hedge Fund Research's index of global managers showing positive returns every single month for the first time since at least 2010. And Man Group Plc, the largest publicly-traded hedge fund, is riding the wave of revived investor interest in the industry.

Assets under management jumped 35 percent to a record $109.1 billion by the end of 2017, helped by net inflows of almost $12 billion, the company said on Wednesday. But the stock slipped as Man warned volatility had hurt the performance of some of its strategies.

How Man's shares perform is closely linked to broader stock market. The stock's correlation with the MSCI World Index was 0.88 percent in the past year (a value of 1 suggests prices are moving in lockstep). The shares are now down almost 20 percent from their January peak after this month's market turmoil.

In time, though, increased volatility -- even if negative for stock markets -- should benefit an active manager like Man. As Chief Executive Officer Luke Ellis told analysts on his earnings conference call, "higher rates generally create significant alpha opportunities across the firm."

Even after the recent stock slide, Man trades on a better forward price-to-earnings-ratio than many peers. Given its expertise in the sexy products designed to exploit machine learning and artificial intelligence, it should be in a strong position to differentiate itself from its competitors.

The company sees the growth of passive products as a chance to capture the money that will instead be allocated to active managers by alpha-chasing investors. But for now, the squeeze on fees in the investment management industry generated by the flows into low-cost exchange-traded funds persists relentlessly.

Man expects its blended margin to continue to deteriorate, albeit at a slower pace. Company executives stress that the decline in margin is down to a change in the business mix, with price deflation mostly affecting older products and those where competition with other firms is strongest.

Ellis said clients are still happy to pay premium fees for innovative products. Total return products, for example, saw net management fees increase to 56 basis points in 2017 from 47 basis points in the previous year.

As far as acquisitions are concerned, the firm looked at 150 potential deals last year. But the world of asset-management is full of what Ellis describes as "panicked buyers," which is pushing valuations to levels Man isn't willing to pay. That makes it more likely the firm will return its excess capital to shareholders, extending the 100 million-pound ($138 million) share buyback it announced in October.

Of the company's top 50 clients, 36 added money to an existing Man product last year, and 31 invested in a new product area. That looks healthy. But just as some species of shark have to keep moving to stay alive, the pressure is on Man to constantly expand the range of fund strategies it offers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

©2018 Bloomberg L.P.

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