Veritas – One giant dividend leap for Man – but a wise move?
Man Group’s decision, announced yesterday, to base its dividend stream to shareholders by setting aside management fee income for the purpose, is in the true spirit of a hedge fund.
Because it means the manager will largely rely on fund performance – as do its investors – to pay its staff what they surely hope will be over-sized bonuses.
Such pure ‘alignment of interests’ is a cornerstone of the hedge fund model.
Man explained the policy in this way: “In the future, the group’s policy will be to pay out at least 100% of adjusted management fee earnings per share in each financial year by way of ordinary dividend.
“In addition, the Group expects to generate significant surplus capital over time, primarily from net performance fee earnings. Available surpluses, after taking into account our required capital, potential strategic opportunities and a prudent buffer, will be distributed to shareholders over time, by way of higher dividend payments and/or share repurchases.”
For 2012 Man will pay total dividends of 22 cents per share.
It will be interesting to see how other listed hedge fund groups react.
It is a brave move for Man, for at least two reasons.
First, with an estimated $59bn assets by the end of last month, it would have been easier for Man than for many of its rivals to sit back, produce adequate performance, in the comfort fees from the whole asset-base would be a hefty cushion.
In the nine months to 31 December, net management fee income of $281m overshadowed just $37m of incentive fee income.
Man deserves a second award for bravery because – as of 24 February – its largest fund, and one third of the assets at its GLG discretionary management unit, were at or somewhere below their ‘high water mark’, so presumably they could yet earn performance fees at all. And given Man’s announcement yesterday, performance becomes far more pertinent.
That the $21bn computer-driven AHL is still about 11% below its own mark on a weighted average basis is not surprising – its performance can be notoriously volatile, as much on the upside as downside.
Another concern could be that not more than two thirds of GLG’s assets are above or within 5% of reaching the point where they can charge a lucrative incentive fee – typically 20% of new profits.
Man bought the GLG discretionary management unit with the explicit purpose of having discretionary funds that could perform while the computer behind AHL did not (and vice versa).
If this year’s markets are kinder to Man, and to the broader hedge fund industry, than they were in 2011, investors will cheer.
And if they are not kinder, then at least investors will know it is more or less ‘performance or nothing’ for the managers.
And shareholders should welcome the new dividend policy – not least because many other income-generating instruments in the markets are either high-risk-for-good-reason, or low-risk for near zero returns.
Man’s shareholders will no doubt watch very carefully, and may lick their lips at, the asset raising activities of Man (for that is what the fixed fee will feed off).
Last year, Man notes, it sold $2.5bn from sources new to the group, including $1bn for a GLG-managed currency overlay in Japan, $600m of guaranteed products, $800m fresh allocations to GLG from ‘new territories’ such as Australia, and a $145m Ucits multi-strategy product.