The last two years have seen a permanent change in the hedge fund landscape, with investors focused more than ever on transparency, governance and liquidity as well as performance. Man has taken decisive action to reflect these changes in our business – actions which were given added impetus by redemptions from institutions seeking liquidity and a period of negative performance at AHL. These factors led to a reduction in assets under management and a sizeable fall in profits in 2010, and mean that our expectations for 2011 remain measured.
We have restructured our Multi-Manager business around the transparency offered by managed accounts, built our global business in onshore regulated products and continued to invest in AHL. The result is a reshaped and rejuvenated Man. We have plenty still to do, but our position at the vanguard of industry change has deepened our competitive advantage. In May 2010, we announced the proposed acquisition of GLG Partners, Inc. in a transaction which gives Man high quality discretionary investment management capability in strategies with a low correlation to AHL. Broadening our range of diversified, liquid strategies for the benefit of our investors, the new business also provides a platform for the build out of further discretionary investment management styles. The hedge fund industry is primed for a new wave of allocations, and we are well placed to strengthen our position as an industry leader.
Following the liquidity and performance challenges of 2008 and early 2009, the last 12 months have been a time of consolidation and rebuilding for many hedge fund styles. While the overall trajectory was upward across a range of markets (in particular equities), the day-to-day picture was more complex. Markets rallied and reversed, with many oscillating in a narrow range, as confidence in the recovery was repeatedly tested.
At Man, assets stabilised at around $39 billion in March 2010. In the first half of the financial year, strong sales reflected very positive managed futures performance in 2008. These were more than offset by institutional redemptions, as Man worked hard to maintain liquidity for institutional investors – a commitment which enhanced our reputation. In the second half of the financial year, weaker AHL performance adversely affected funds under management, with muted sales and reductions in product investment exposures.
Lower average assets over the period, $42.6 billion compared to prior year $65.1 billion, translated into lower net management fee income of $463 million. Performance fees were modest at $97 million, 27% of the prior year. The combined effect saw profits before tax and adjusting items of $560 million, down from $1.2 billion the previous year.
As we entered the new financial year, funds under management began to recover, AHL performance improved and we announced $1.5 billion of new institutional mandates, which will be included in FUM over the coming months. Funds under management at 25 May are estimated at $39 billion, broadly unchanged from $39.4 billion at financial year end.
A sense of caution remains evident among institutional and private investors. The recovery in the hedge fund industry's assets under management was driven by performance rather than flows. Nevertheless, my frequent conversations with our investors, partners and peers lead me to believe that investor appetite for hedge fund investment is rebuilding, with high-end institutional investors in particular looking to reallocate to hedge funds. The two seminal investment management years of 2008 and 2009 have emphatically underscored the long term investment proposition of hedge funds: attractive diversifying returns, actively managed downside risk and lower levels of volatility. In order for the rationale of hedge fund investing to translate into allocations, new standards need to be achieved across the industry. Prerequisites are enhanced transparency, control of assets and flexibility in portfolios that translates into performance, along with demonstrable financial strength and business sustainability. There is also a genuine requirement for transparent, locally regulated product formats. Much of the activity this year at Man has been geared to meeting these expectations. I pay tribute to the significant effort from our employees across the firm to ensure we have adapted to address these evolving requirements, without losing focus on performance and client service.
