THE QUESTION wrapped up in the enigma of Man Group’s share price is whether the explosion of investment in hedge funds is a bear market fad or something sustainable in the long term.
Man is the UK’s biggest hedge fund manager and its shares have surged in recent years as it harvests cash from wealthy investors who have decided to duck out of the traditional equity market. As of this week, the company is looking after $28bn of other people’s money – and for fees that would bring a tear to the eyes of traditional fund managers.
The group polarises opinion in the City. Its detractors have an ill-formed suspicion, a “something in the woodshed” mentality that probably stems from the disaster of Long-Term Credit Management, the notorious hedge fund collapse in 1998. Hedge funds are dangerous investments; it does not necessarily make hedge fund managers dangerous, too. Man insists that it runs highly diversified funds of funds, using more than 200 underlying managers and spreading its investments among the many weird and wonderful styles of hedge fund activity.
Harvey McGrath, the chairman, did accept yesterday, though, that returns from many of these styles will tend to fall as more money chases the same opportunities for exploiting mispricing by markets. He argues we are not there yet, though it does seem returns from the hedge fund industry have been lower in the last 18 months than previously.
Not at Man, though. It had a bumper year for performance-related bonus fees which, on top of standard fund management charges, took profits to pounds 297m. That compares with pounds 193m the previous year, before Man owned the Swiss group RMF, which has brought the group big new institutional clients.
Even if stronger equity markets do tempt back some investors, the bear market in shares has taught the need to diversify. Hedge funds should account for more than the current 2 per cent of investments.
On 12 times forecast earnings in the next year but one, and with no reason to suspect Man will be de-rated, the shares still look worth having.
