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However large Man Group grows, one thing never changes – the vulnerability of its share price to sentiment. At least this year, the mood around the world’s largest listed hedge fund manager has been predominantly positive. The shares are up 7 per cent since last month’s upbeat trading statement, fuelled by renewed speculation of a bid from a US bank and hopes of a demerger of Man’s brokerage business, which would in turn set up both units as attractive takeover targets.
Financially, a deal at a premium would probably not be hard to justify. The recent rally has still left Man trading at nearly a 4 per cent discount to global asset managers on calendar 2007 earnings estimates, according to Morgan Stanley. The usual argument for the discount is that Man lacks the annuity-style asset base of a traditional institutional fund manager; assets can walk out of the door in a flash. In reality, Man’s asset growth has comfortably outpaced the wider industry in a bull market that has also witnessed several hedge fund scares.
Include unpredictable performance fee income, and the discount to peers widens to about 25 per cent. On these numbers, management probably wishes it took Man private when it was still small enough for a buy-out.
However, the case for a purchase by a financial institution has flaws. Few could afford a deal of this size. Man’s success derives in part from having its own brand in hedge funds and being independent of the likes of Goldman Sachs and Merrill Lynch, which have been touted as bidders. Credit Suisse has already shown itself willing to pull client funds from Man to reinvest them through its own fund of hedge funds business.
Moreover, scaling up Man further might be difficult, particularly creating new capacity in its core funds. That is especially an issue for its star black-box product, AHL, which accounts for about half of earnings including performance fees. Against that backdrop, investors should remember that Man’s stock is equally vulnerable to negative sentiment when the perennial bid rumours evaporate.