Man Group, the world's largest listed hedge fund manager, said clients withdrew money over the summer months at the fastest pace since early 2009 amid "relentless volatility" in world markets, knocking its fragile recovery.
Man Group shares were down 21 percent to a five-week low at 189 pence on Wednesday after the firm said clients pulled out a net $2.6 billion in the three months to end-September, with its GLG unit particularly suffering.
"Sentiment is clearly in the doldrums. We are assuming sentiment remains suppressed ... A lot of what happens from here will be dictated by wider market sentiment," chief executive Peter Clarke told journalists on a conference call.
Man's trading update raised questions about its $1.6 billion acquisition last year of smaller rival GLG, which it bought to diversify its business away from its main computer-driven fund AHL and enhance earnings power.
"I think the exit is bigger than expected and the overall performance is so poor across the piece at GLG, people are once again questioning why they did the deal," one top 30 investor told Reuters on condition of anonymity.
Outflows accelerated in September, he said, making the latest quarter the worst for the group since shortly after the collapse of U.S. investment bank Lehman Brothers.
Singer Capital Markets analysts had expected net outflows of $200 million in the three months to end-September.
Man had enjoyed $4.4 billion of net subscriptions in the first six months of 2011, following two years of redemptions.
But investor confidence has been hit by the euro zone's deepening debt crisis and fears of another global recession, driving asset prices lower and pushing MSCI's World index of stocks down nearly 15 percent since end-June.
Clarke said a couple of large institutional investors had each pulled out "a few hundred million dollars".
The outflows, coupled with performance losses, helped drive total assets under management down to $65 billion at end-September from $71 billion at end-June.
Man was hit by poor performance and redemptions from hedge funds run by its GLG unit.
In particular, its Alpha Select hedge funds fell 13.7 percent in the five months to August, while its European Opportunity fund was down 12.4 percent and its Emerging Markets fund was 14.7 percent lower.
Clarke said the Emerging Markets fund had been caught out by sharp market swings, while the other two were hit as market "fundamentals have been overridden by macro concerns."
"We all had our eye off the ball with GLG. We all focused on AHL doing better and we hadn't seen the hooligan called the GLG in the other lane," the top 30 shareholder said.
According to Hedge Fund Research's HFRX index, the average hedge fund is down 7.78 percent this year, after a volatile summer in which some big name managers have suffered.
Man's flagship AHL fund, a $24.9 billion computer-driven program named after 1980s founders Michael Adam, David Harding and Martin Lueck, saw its assets rise.
The fund, which tries to make money following market trends, is up 1.5 percent in performance terms so far this year, leaving it around 5 percent away from its so-called high-water mark, the level above which it can earn lucrative performance fees.
Man's outflows will be a particular disappointment to the industry given some indicators had shown the $2 trillion hedge fund sector might be seen by investors as a shelter from market volatility and the euro zone's deepening debt crisis.
Last week, the GlobeOp Forward Redemption Indicator, a snapshot of clients asking for money back, showed only a small rise, indicating investors were broadly sticking with hedge fund allocations through the summer volatility.
Earlier this week, Aberdeen Asset Management, which runs predominantly long-only funds, reported $800 million of net outflows in the two months to end-August.
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