Annual performance fees can amount to a free option for a fund manager as the upside is uncapped but the downside is limited to the base fee. Yet Man Group is not your run of the mill hedge fund. As the world’s largest publicly traded hedge fund manager, it charges 20% in performance fees on top of a 2-4% annual management fee depending on the offered product. “The 20% performance fee is fairly standard for hedge funds,” says Jason Streets, Head of Research at Evolution Group in London. “Their growth has been enormous.”

Man’s pre-tax profit in the year ending March 31 will likely come above $1.82bn when the company reports end of May, according to an average estimate of 13 analysts who follow the company. Man earned $1.3bn in the previous 12 months. Its flagship $3bn AHL Diversified fund rose 22.8% during the 12-months through March, beating the 10% gain for the Credit Suisse/Tremont Hedge Index and boosting performance fees, according to a company official.

“Net performance fee income will be up strongly over last year and above expectations, reflecting good performance across a range of our products in the year, and from AHL in particular,” notes a trading update ahead its fiscal year closing period. “Net management fee income will be up over 15% on the prior year, driven by the growth in funds under management.”

It is unlikely however, that Man’s results will assuage critics of investment management fees. In the least, its performance should reinforce the idea that fee structures should not be standardised across the industry considering the increasingly diverse strategies and mandates pursued by managers. While base fees are calculated as a percentage of funds under management, with the ill-intended effect of favouring asset gathering more than performance, hedge funds like Man that have fee structures with high hurdles and water-marks provide managers with a strong incentive to achieve above market returns. Viewed as such, performance fees are more than a free option for a manager; they are rather a measure of the management team’s confidence and capacity to capture alpha.

So far, Man seems to have escaped the size conundrum, the fate that awaits funds with growing assets under management, allowing them to cash in on management fees at the expense of performance. Man’s funds under management are estimated at $75bn, having risen from $61.7bn in March 2007. Nearly $31.4bn of this figure is institutional. In spite this growth, Man’s AHL fund, which is driven by a quantitative trading system, has been posting particularly strong results. Figures will be officially released at the end of May.

“This is a very strong set of results achieved through a period of significant market turmoil,” says Peter Clarke, CEO of Man. “Good performance has added $5.3bn to investor assets during a period when global markets were exceptionally volatile.”  Man was short the sub-prime market. Meanwhile, the group’s performance fees rose 28pc at a time when a number of hedge fund managers, have had to liquidate funds to cope with declines.

Man is a specialist in various alternative asset classes, including hedge funds, leveraged finance and convertible bonds. In its core hedge fund asset class, Man Investments offers fund of hedge funds and structured products. It was floated on the London stock Exchange in 1994.

VB