Good morning, ladies and gentlemen. As an Arsenal supporter, I'll be even more somber this morning than I'm usually are. Thank you for joining us. What we're going to do, as usual, is I'm going to start by giving you a brief introduction. Jonathan will then take you through the numbers in detail, after which I will come back to talk about performance and business development, with an emphasis on assessment of our progress over the last three years. I will then give you our outlook, we will throw it open for questions. Performance across our investment managers during 2015 was mixed, reasonable against a difficult market backdrop. There were a range of return across AHL strategies, with momentum strategies impacted by market volatility during the year. The AHL Dimension Programme delivered strong performance.
GLG equity long-short strategies had a good year, the majority of the long-only strategies were ahead of benchmark, albeit certain strategies were somewhere behind. Numeric posted strong outperformance versus benchmark for another year, FRM's performance was nothing but solid. Flows were slightly positive, with net inflows of $2.9 billion in the second half of the year, more than offsetting net outflow of $2.6 billion in the first half. While this outcome is not as strong as we would have liked, it is again a reasonable result in the circumstance. The acquisitions of Silvermine, NewSmith, BAML Fund of Fund business, together with strong long-only investment performance, drove an 8% increase in funds under management to $78.7 billion at the 31st of December 2015.
Adjusted profit before tax decreased by 17% versus 2014, mainly due to lower AHL performance fee following a strong 2014, while adjusted management fee profit before tax of $194 million was broadly in line with 2014. In line with our dividend policy, we will be paying a final dividend equating to adjusted net management fee earning per share of $0.048 or GBP 0.034 per share payable in May. This year, we have decided to retain all of the surplus capital generated by the business to fund potential acquisition. Last year, we reviewed a large number of acquisition opportunities, we found that transaction were unavailable on sufficiently attractive terms. The board believes that given evolving market dynamics, there is sufficient probability of finding attractive acquisition to execute this year, that we have decided to retain all of our surplus capital.
Conditions may, of course, change, and we will keep the situation under review in the course of this year and retain the ability to execute buyback if advantageous to do so. I will now hand over to Jonathan to take you through the numbers in more detail.
Thank you, Manny, and good morning. Let's start off by looking at the movement in funds under management for the year. 2015 saw a 5% increase in gross sales to $22.9 billion, with strong quant sales being partially offset by lower sales of GLG equity long-short strategies compared to 2014. The majority of the demand continues to come from institutions, and gross sales for the year included three institutional mandates totaling $2.4 billion into AHL Dimension and AHL Alpha, a $2 billion managed account mandate from a North American pension fund, and a $1.1 billion mandate from a single sovereign wealth fund client investing into two Numeric strategies.
Redemptions were $22.6 billion for the year, up from $18.6 billion in 2014, with this figure including $2.8 billion of redemptions from one client in the Japan CoreAlpha strategy, despite long-term strong performance and $1 billion of redemptions from our North American equity strategy. During 2015, investment performance across our four managers increased funds under management by $2.4 billion, reflecting strong absolute returns across our quants alternatives and discretionary strategies. Manny will talk about performance in more detail later on. Man's functional currency is US dollars, and funds under management are reported in dollars. During the year, the strengthening of the dollar reduced fund by $2.4 billion, of which EUR 1.3 billion related to the euro, GBP 600 to sterling and AUD 400 to the Australian dollar. The detailed breakdown of fund by currency is set out on page 33 of the appendix.
Included in the other category were Silvermine, Pemba and Ore Hill CLO maturities totaling $1 billion, partially offset by net positive investment exposure movements of $400 million. We've included further detail on the contractual schedule of CLO maturities in the appendix to the presentation. The guaranteed product gearing movement for January and February is net zero. The rule of thumb at current levels of market exposure is that every one percentage point of positive AHL performance results in a re-gear of $15.15 million, whilst every one percentage point of negative AHL performance results in a $30 million de-gear. Please be aware, however, that with guaranteed product fund at such a low level, there are a number of variables which could impact these movements. This next slide gives a breakdown of gross and net management fee margins.
In aggregate, our total net margin has decreased from 114 basis points to 96 basis points compared to 2014. Now that we have a substantially more diversified business than historically has been the case, to assess meaningfully our margin trends as a business, one needs to look at movements within each product category. The quant alternatives gross and net margin reduced by 50 basis points and 40 basis points respectively compared to 2014. This was due to the impact of including Numeric Alternative Fund for a full year, and the addition of the large institutional mandates I described earlier, which were at a blended margin of under 100 basis points. The roll-off of the high-margin retail back book, where the blended net margin was over 250 basis points, reduced the margin further.
The run rate net margin at the 31st of December 2015, adjusting for the full year impact of including the AHL institutional mandates won during the year, is 145 basis points. Looking forward, we would expect the mix shift towards institutional money to continue. Hence we would expect the overall margin to decline further. Gross and net margins in the discretionary alternatives category reduced by 32 basis points and 26 basis points respectively compared to 2014. This was due to the inclusion of the Silvermine assets, which have an average margin of around 40 basis points, and due to redemptions out of the European long-short strategy, which were at a higher margin than the average for this category. The reduction is lower at a net level due to the release of about $5 million of historical commission provisions, which are no longer required.
The gross and net margin in the alternatives fund of funds category decreased by three basis points and six basis points respectively in the period. This was due to the inclusion of the acquired BAML fund of funds assets and a continued mix shift towards managed account mandates. The run rate net margin at the 31st of December 2015 in this category is 70 basis points due to the inclusion of the $2 billion North American pension mandate. This margin will decline further as another infrastructure mandate won in late 2014 funds over the next 12 to 18 months. As more generally, the business shifts towards lower margin managed accounts and away from traditional fund of funds.
The long-only quants gross and net margin remained stable at 34 basis points compared to 2014, as the Numeric assets acquired in September of 2014 have a similar management fee margin to the existing NSS assets, albeit around 40% of Numeric long-only assets earn a performance fee with an average of 12% over the benchmark. The long-only discretionary gross and net margins have increased by four basis points and seven basis points respectively, largely as a result of the $2.8 billion of Japan CoreAlpha redemptions mentioned earlier, which were at a lower margin than average for this category. The guaranteed net margin increased by 59 basis points compared to the year end of 31 December 2014. The increase in net margin was due to placement fee write-offs in 2014 totaling $7 million. Let's now look at net revenues in more detail.
The main driver of the 3% increase in gross management fee revenue and the 6% increase in net management fee revenue was higher average fund levels as a result of acquisitions, partially offset by the decline in the blended management fee margin. External distribution costs were 26% lower than 2014. This was firstly due to lower retail quant alternatives and guaranteed products fund, both of which have higher external distribution costs associated with them. Secondly, due to the release of the commissions provisions, which I just explained. The best way to model external distribution costs is to model gross and net revenues using the margins we provide, with the difference between the two attributable to external distribution costs. Gross performance fees of $302 million were 11% lower than 2014 due to lower performance fees from AHL, partially offset by higher performance fees from Numeric.
Of AHL's $218 million of performance fees earned in 2015, $110 million were earned from diversified and alpha strategies, $58 million from Evolution, and $44 million from Dimension. As at the 31st of December 2015, 42% of AHL open-ended fund, or $7 billion, was at high-water mark, and the weighted average distance from high-water mark for open-ended fund was 3.6%. Given the positive performance during January, 72% or $11.8 billion was at high-water mark. Numeric performance fees were $40 million, with the majority being earned from alternatives, international, and U.S. large cap strategies. Around 70% of the $37 million of GLG performance fees were earned from U.S. and European equity alternative strategies, with the remainder earned from the credit funds.
As of the end of December, 34% of GLG's performance fee eligible assets, or $3.7 billion, were at high-water mark, and 38% or $4.1 billion were within 5% of high-water mark. Given market moves during January, this position has deteriorated to about 1%, or $160 million of assets being at high-water mark, and 21% or $2.2 billion being within 5% of high-water mark at the end of January. The $7 million of FRM performance fees came from a range of their products. We've included additional detail on 36 and 37 of the appendix to assist with modeling performance fees. Finally, investment gains were $24 million, with around $15 million relating to gains on the residual balance of less liquid assets and $9 million relating to the mark-to-market gains on our liquid seeding investments.
There was a mix of gains and losses in our liquid seeding portfolio, with gains on the equity interest in our CLOs and Numeric funds and other investments offset by losses on GLG seed investments. Moving on to costs. This slide gives a more detailed breakdown of movements year-over-year. Compensation costs for the year were $462 million compared to $391 million in 2014, an increase of 18%. Within this, fixed compensation costs were $177 million compared to $155 million in 2014, with $10 million of the increase being due to a less favorable hedged GBP rate in 2015 versus 2014, coupled with a $12 million impact from acquisitions. Fixed compensation costs may be slightly higher in 2016 and more in line with the previous guidance given of $185 million.
This is due to the inclusion of 2015 acquisitions for a full year, some base salary increases, and the fact that we continue to invest in investment management talent to grow the business, all of which is partially offset by a more favorable hedged FX rate compared to 2015. Variable compensation costs were up $49 million to $285 million. The $19 million or 12% increase in management fee-related variable compensation was largely due to higher management fees earned as a result of current and prior year acquisitions, in particular, Numeric. Performance fee-related variable compensation increased by $30 million, despite a drop in performance fee revenue. The increase is due to higher compensation related to the GLG European equity long-short strategies, where teams are compensated based on gross trading profits.
Although the teams generated positive performance in 2015, overall, the strategy did not earn material performance fees, as given negative performance in 2014, we started 2015 well below high-water mark. The total compensation to net revenue ratio was 43% for the year compared to 36% in 2014. We've said previously, we expect the total compensation to net revenue ratio to be in the range of 40%-50%, depending on the mix of revenues. In years where the mix is more skewed towards GLG, the ratio will be at the higher end of the range. In years where the mix of revenues is more skewed towards AHL and we have material gains on investments, the ratio will be at the lower end of the range and could be off the bottom of the range where we have a significant level of AHL performance fees and minimal GLG performance fees.
Other costs of $177 million were in line with 2014. Of this, cash costs were $161 million, which is 7% higher compared to 2014, reflecting the impact of the less favorable hedged GBP rate in 2015, and to a lesser extent, the costs of the newly acquired businesses, partially offset by continued efforts to remain disciplined on costs, which has resulted in a lower underlying cost base compared to 2014. We would expect other cash costs to remain at a similar level to 2016, with the impact of a more favorable hedged FX rate for 2016 being offset by certain investments in the business and inflation. We explained at the half year, our CapEx is increasing and is now expected to be around $40 million-$50 million in aggregate over the next two to three years as we carry out a number of technology-related projects.
We have included guidance on CapEx and depreciation and amortization for 2016 in the appendix to the presentation on page 39. Asset servicing costs for the year were $32 million, which is 19% higher compared to last year, driven by an increase in average fund and the reclassification of certain asset servicing related costs that had historically been included in fixed compensation and other costs. There are currently no asset servicing costs associated with Numeric assets because the majority of their business is in managed accounts. However, as their usage business grows, this could change. For the rest of the business, the cost works out at around five to six basis points of average fund, albeit this figure can vary depending on transaction volumes, the number of funds, and fund NAVs. Finishing the P&L review with earnings.
Manny mentioned, total adjusted profit before tax was $400 million, down 17% compared to last year. Adjusted net management fee income was $194 million versus $198 million in 2014. Adjusted net performance fee income was $206 million, down 27% from 2014 as a result of lower performance fees from AHL and higher compensation costs at GLG, as I just explained. Adjusting items were $216 million in total, bringing statutory profit before tax to $184 million. The adjusting items include $92 million of acquired intangibles amortization, $62 million relating to the revaluation of earn-out payments, principally for Numeric as the deal has performed more strongly than expected, and $41 million relating to the impairment of goodwill in FRM announced in the first half. Adjusted earnings per share for 2015 were down 14% to $0.211 per share.
Adjusted management fee earnings per share, the basis for the dividend, which Manny set out earlier, were $0.102. The effective tax rate on adjusted profits was 10% for the year, which is consistent with the effective tax rate for 2014. This is lower than the underlying tax rate of around 13%, primarily due to the release of $17 million of tax provisions that are no longer required. The underlying tax rate of 13% in 2015 is lower than the underlying tax rate of 17% in 2014, due to a lower U.K. tax rate and a higher proportion of profits earned in the U.S., where we're paying a minimal level of tax. As we have previously explained, we have $225 million of U.S. tax losses, which we can offset against future profits from U.S. entities.
In addition, we have $537 million of tax amortization of goodwill and intangibles, predominantly relating to Numeric and Ore Hill, which will be amortized in the U.S. over the next 15 years, and which will reduce U.S. taxable profit in future periods. To finish off, let's look at our capital position. Our balance sheet remains strong and liquid, with net tangible assets of $704 million, or $0.41 per share at the 31st of December 2015. As we have previously outlined, we have increased the capacity of our seed capital program to help grow the business as we launch new products over time. The book is sized in accordance with a VaR limit of $75 million, and in aggregate stood at $526 million at the 31st of December 2015.
We expect the aggregate size of the book could reach up to $700 million, but will continue to be managed within VaR limits. Further detail on the composition of the seed book is included in the appendix on page 50. Surplus capital at the 31st of December 2015 was $453 million, which has increased from the 31st of December 2014 position of $419 million, due to the inclusion of $113 million of H1 2015 post-tax performance fee earnings, partially offset by the increased intangibles deduction related to 2015 acquisitions, and an increase in the size of the seeding book. Surplus capital is around $480 million after including H2 2015 profits, which are not included in the 31st of December 2015 figure until they've been verified, and the payment of the final dividend.
As we mentioned at the half year, we submitted our scheduled biennial ICAAP to the FCA in respect of our capital requirements. To date, there has been no change to the internal capital guidance scalar that is applied as part of the calculation of the financial resources requirement. With that, I'll hand over to Manny.
Thank you, Jonathan. I want to spend the remainder of the presentation talking about the progress we have made against our key objectives over the past three years, and given that the restructuring of the firm is now complete, where we see the opportunities for growth going forward. Quant. Let's start by looking at the quant business, comprising AHL and Numeric. Since the financial crisis, our focus at AHL has been to build a much broader, diversified global quantitative investment management business, which does not just rely on traditional trend following strategies. Clearly, government intervention in financial markets, or simply the threat of government intervention, in the five years or so after the crisis had undermined the effectiveness of traditional trend following strategies.
While recognizing that the traditional trend following will continue to be very important to us, we have been able to achieve a goal of building out and diversifying our quant business, both organically within AHL and inorganically through the acquisition of Numeric. Most importantly, our performance over the last three years has been strong on an absolute and relative basis. Our traditional trend following products, Alpha and Diversify, have annualized returns of 7.1 and 8.1 respectively over the last three years, while our newer fund, Evolution and Dimension, have annualized returns of 13.2 and 8.5 respectively. This performance placed AHL strategies in the first or second quartile compared to its peer group. Numeric performance, both before and after our transaction, has been very strong with asset weighted outperformance of 2.8% in 2014 and 3% in 2015.
Over 90% of Numeric current quantitative strategies have outperformed the benchmark over one, three, and five years. Within AHL, with the development of new products such as Evolution and Dimension, we have been able to diversify the business, raising over $6.6 billion for new strategies over the last three years, with approximately 60% of assets under management in AHL now comprising non-traditional strategies. With the development of these funds, AHL's business has become increasingly institutional in nature, with over 70% of assets now coming from institutions. With the addition of Numeric in 2015, we doubled the size of our quant business, taking it to a combined $35 billion, and added a world-class long-only quant equity capability. Performance since the acquisition has been very strong and sales volume encouraging.
Overall, assets have increased from $15.2 billion to $19 billion, with $6.5 billion of gross sales and $4 billion of net flow since the acquisition. The integration has gone remarkably well, and we have found good opportunities for Numeric to work with our other investment engines in a variety of areas. We continue to build our quant business with new products such as Evolution Frontier and Target Risk, and are providing increasingly tailored solutions in quant strategies, incorporating both traditional and newer products for large institutional clients. We have every confidence that over time, through Numeric and AHL, we will be able to build a leading business across quantitative investment strategies. Let's now move to GLG. Our performance on the alternatives side of the business has been somewhat disappointing over the past three years.
On an absolute basis, we, along with the rest of the industry, have had a challenging few years. We have outperformed though, on a relative basis, with GLG returning 3.1% on an asset-weighted basis, while the HFRX has returned 2.6%. As a result, we have not been able to attract a significant amount of capital to our business over the last three years. Those funds that have performed well have tended not to offer a substantial amount of capacity for new money. Our credit fund, Market Neutral, Euro Distressed, and Crave have good risk-adjusted track records that compare favorably with peer groups but have limited capacity. Our European equity long/short business has had a mixed record over the past three years, with good years in 2013 and 2015 offset by a weaker 2014.
The performance of the newer strategies launched over the last few years has been reasonable given the circumstance but not yet sufficient to deliver growth. An exception to this is the European mid-cap strategies, which launched in 2015 and has had strong performance to date, and we continue to hire talent to broaden the range of sector and strategies managed within our flagship European long/short fund. By contrast, over the last three years, we have been able to build more optionality into our long-only business. We have been able to attract great long-only talent, for example, Rory Powe, Henry Dixon, and lately, Guillermo Osses from HSBC, and to develop people internally as well, such as Ben Follow. We also hired a fantastic long-only EM equity team.
There are a variety of reasons why managers join GLG, including our investment culture, the autonomy we provide our managers, our infrastructure, and competitive economics. The performance of our newer managers has been very good on the long-only side, and we are beginning to see inflows into new strategies. Overall, while financial results of our new managers has perhaps not been quite as good as we would have liked, we have done reasonably well. The net effect of the new business activity over the last three years has been that the teams have broken even, and we have substantial optionality to generate organic asset growth over the next few years, in particular in European equities and in emerging market debt and equity. Let's talk about fund of fund business and FRM.
Since 2008, the fund of hedge fund industry, in particular outside the U.S., has come under a significant amount of stress as a result of poor investment performance across the board during the financial crisis. Our fund of hedge fund business, comprising originally of IMS, MGS, and Glenwood, this is a walk in the memory park, all suffer as much as any participant or more over this period. Since that point, we have been dealing with a rapid outflow from a legacy fund of fund business, which have now all but come to an end. In response to this circumstance, we have stabilized the business through the consolidation of a number of firms in this space, providing the scale and breadth to offer institutional and wealth clients the product they need.
In 2012, we acquired FRM, which injected new life into our business and built an important new relationship with Sumitomo Mitsui. Since then, have acquired Pine Grove and Daniel Fund of Fund businesses, each adding product capabilities and distribution. As a result, the FRM business is of a viable level of scale and profitability and has given us a foundation from which to build our manager account business, which in turn has enabled us to build important new client relationships, particularly in North America, where last year we secured mandates from two large state pension plans. Furthermore, FRM has fostered the development of alternative beta product, which we have begun to market to clients. Crucially, our managed accounts and alternative beta products have been developed over a long period as part of our investment strategy in front of hedge fund.
As such, they have been developed with the needs of hedge fund investors in mind, strongly differentiate our offering for more distribution-focused competitors. Let's now look at our distribution. We have very substantially restructured our sales capability as a result of the changing nature of our business. We dramatically cut back our activities in the retail space that historically had focused on the structured product business. We have retained a low-cost retail footprint in this region should demand return. We designed and implemented a new sales commission scheme, which provided much better alignment with the shareholder and better suited an open-ended product base. We also upgraded the sales team through internal promotion and external hires in a number of geographies and channels. The impact of these changes has been a steady improvement in sales volume.
In 2015, we generated $22.9 billion of gross sales compared to $12.8 billion in 2012. Over the last three years, we have generated positive net flows in 8 quarters out of 12, and in 2 years out of 3. We have plenty of work to do. However, particularly in the U.S., of which more in a moment. We'll continue to benefit from the trend whereby large institutions are putting more money to work with fewer providers. As a result, we have seen many large mandates over the last three years, and last year in particular, as John described. We continue to try to build broad relationships with our clients and now have 74% of our assets from clients with more than one product. Let's now look at the growth of our North American business, which has been a key strategic focus over the last three years.
Over this period, both organically and by acquisition, the North American business has become a significant contributor to the group. 3 years ago, the North American business would have comprised less than 10% of the overall group. Today, the North American business manages one third of our assets and approximately 25% of our AUM is run for clients domiciled in North America. Gross sales in 2015 were $5 billion, more than the total raised in the previous 3 years. I do not think we will ever be entirely happy with our business in the U.S. given the scale of the opportunity, but we certainly have made progress over the past few years. I myself have been spending most of my time in the U.S. this year, and will continue to do so as it represents such a key area of focus for us.
Finally, let's look at what we have achieved from an efficiency and capital management perspective and the flexibility that has provided us to make acquisitions. The decline of our structured product business from 2009, driven both by sustained low interest rates and poor underlying fund returns, had very fundamentally changed the economics of the firm. The structured product business has nearly run off, and we do not expect it to return for some time. Even if then, it is unlikely to be conducted on such attractive terms. Furthermore, we sustained margin deterioration in many areas of our current business, generally as a result of the mix shift from retail to institutional business, but also as a result of margin erosion in high-capacity quant product. The economics of our business have changed. Scale and efficiency are therefore crucial.
Accordingly, from 2012, we have been very focused on the delivery of our cost-saving program, through which we roughly halved the fixed cost base of the business on a like-for-like basis. We are now comfortable that we are running the business as efficiently as we should be for the set of opportunities that we are pursuing. Of course, if the environment and business conditions change on a sustained basis, we will adapt accordingly. From a balance sheet perspective, we have also restructured significantly, reducing our overall capital requirement by moving from full scope to limited license, selling assets, and buying back both debt and equity. Our balance sheet is strong and liquid, and our decision to retain surplus capital this year, rather than execute a share buyback, is driven by a desire to have a solid and flexible financial position in these uncertain times.
We also renegotiated our revolving credit facility with a billion-dollar line available to us until 2020. With this context, acquisitions are an important value driver. We have made a number of acquisitions over the last three years, which have generally gone very well. While they might underperform, deals have been structured to mitigate the effect. We are well-positioned as a consolidator within the asset management industry and have a proven ability to integrate business quickly and efficiently, both from an operational and cultural perspective. We are particularly happy that the deals have worked well culturally and that several members of the management team of the businesses we have acquired have taken broader roles within the group after the transaction. That said, we have tried to maintain a discipline on structuring and pricing acquisition.
In the last 12 months, we have reviewed a large number of acquisition opportunities, but were unable to conclude any on such satisfactory terms. We are hopeful that the M&A environment this year will be more conducive. The pipeline of deals is somewhat stronger today than it has been for some time. Let me just finish with our outlook for 2016. As we have seen during January and February, the overall operating environment continues to be very volatile. Flows are better in places, as we saw in the last quarter, but investor appetite remains fragile. Our strategies have held up reasonably well given the backdrop. However, we remain cautious in our outlook for 2016 given the heightened uncertainty in the markets.
Our key area of focus for 2016 will be continuing to work on the U.S. as a region for growth, both from a distribution and acquisition perspective, hiring additional high-caliber talent at GLG, and building both new and existing relationship with key institutions to grow assets. In addition to this, as ever, if we are able to deliver superior risk-adjusted returns for our clients, we will be able to grow assets steadily by leveraging our distribution. Doing so will further enable us to continue to attract the best investment talent through hiring and acquisition. As we continue to manage our business and balance sheet efficiently, we can in turn provide attractive returns for our shareholders. With that, let's move to Q&A in this room and also on the phone.
Thank you. Thanks so much. That was very clear. I wondered if you could say a little bit more about acquisitions, given that by foregoing buybacks, you must have a reasonable level of confidence in deal-doing ability. Is it simply because you see so many deals and pricing's got a bit better that you feel things must be doable, or is there anything more tangible than that? Thank you.
Do you want to start?
Look, we looked at a large number of opportunities last year. We probably met with about 160 managers in the course of last year across public and private markets. The environment for deals was probably the most difficult that we've seen in terms of price expectations of sellers. We think with what's happened to public market valuations in the asset management space in the first six or seven weeks of this year, that that should have a knock-on impact through the course of this year on the M&A side, which there's a natural lag from public to private markets. A, because deals just take time, and B, because there is just a bit of a lag.
It's not that long ago, I'm talking about a few weeks ago, that there was some quite aggressive deal activity announced in the U.S. at pretty high multiples with very high upfront cash components. I wouldn't say that the cycle has categorically turned just yet. That all said, we think we've seen more situations come up in recent weeks and months than certainly had been the case a year ago. Things look a little bit more optimistic now. It's still very difficult to get these deals done and even more difficult to get them done on terms that make sense to us. I wouldn't want to overstate the level of confidence that we have that we will be able to do deals this year, and we'll continue to hunt around for the right situations on the right terms.
I think, Philip, I think one of the things we've said repeatedly is the last thing we're going to do is a deal where one plus one equal two. We need to find a good reason why this is good for shareholders, and that either we're able to distribute significant assets for people like Numeric, or there is significant cost synergies or both. We're incredibly focused on this, and I think we are doing our hardest to try to find the right place to put our capital to work. Arnaud?
Arnaud.
Hi, if I can just continue a bit on the M&A. What sort of opportunities might you be looking at? Is it mostly in the U.S.? Are you looking across alternatives and long-onlys? Secondly, I was wondering about the cost base, the hedging policy you have there. Could you give us a bit more detail as to how your hedging looks over the next two years? Finally, could you give us an update in terms of capacity at Alpha and Dimension? Sorry, Dimension and Evolutions. Thanks.
Okay. I'll take one and three very quickly. I think to answer three, in the current state of affair, we have about $500 million of capacity in Dimension, and in Evolution, we have none. The fund is closed. That obviously may change depending on new markets, depending on liquidity. This may move up and down, and we'll do what's right for the investor in the fund. In terms of acquisition, I would say that I would not rule anything, but it is likely to be in the U.S., given the scale of opportunity and given the quality of best-of-breed manager that we can find. It is almost very unlikely to be on the continent, for example. I think that we will look hard, and we'll try to find the right candidate. On the hedging policy?
We hedge each quarter one year in advance. We've done the first quarter hedge for next year at the beginning of this quarter, which was at USD 1.48 to the pound. Then we'll just hedge at the beginning of each quarter one year forward.
Good morning. Tony Gray from Barclays. A couple for me. A question on the net management fee margin trends. In one of the slides, you indicated on the alternative coupon side that the blended on new sales is 127 basis points. Is that kind of where you see over the next sort of few years, that 145 average? Trending. Connected with that, you mentioned the institutional proportion, quite a lot that's been sold at 100. How stable is that? Could you see that component trending any lower? Second question, you mentioned, as I understand it, on the variable compensation that the GLG equity long/short had good performance in 2015, but such was the performance on 2014 base that they were paid performance fee away to the managers, but it didn't contribute much to performance fee revenues.
Given where the funds stand relative to high-water marks as we are in 2016, are you confident that that is unlikely to recur in 2016? Thank you.
On the first point, I think the margin guidance within AHL remains the same, which is for capacity-constrained products, like Evolution, where we've sold those all at two and 20, that margin picture is sustained to be The traders get paid on the basis of the gross P&L that they generate. If you have a trader trading a GBP 100 million book and they make 10%, that's a GBP 10 million profit. They will get paid a proportion of that profit. You had 7% on the way back up to high-water mark on about GBP 4 billion of assets is GBP 280 million of gains. We're paying out very roughly 10% of that. That's the reason for the GBP 28 million or more or less higher than expected compensation charge.
That is a feature of the compensation structure of GLG that I think we've been quite clear on in the past, the unsatisfactory outcomes for the shareholder that can accrue from that model on the performance fee side. It should be said as a counterbalance to that on the management fee side, there is no incremental cost associated with incremental management fees. That's why we have this model on the management fee side. If you raise $1 billion at 2%, you should have more or less $20 million drop to the bottom line. However, on the performance fee side, it does have this very unsatisfactory feature from a shareholder's perspective. Looking forward, we would again urge you to think about this feature.
If we have, say, a flat year this year in ELS, and you have roughly 32 books being run within that fund, inevitably there will be some netting risk that we bear. Some will be up, some will be down. From the outside, it's very difficult to actually assess what's going on because you don't see the books on a day-to-day basis, but it's always a possibility.
Dave, I mean.
Morning. It's Haley Tan from Citi. I'm afraid another question on M&A, just to clarify something. Should we be thinking about this in terms of big transactions or infill? We can see you've got $480 million of surplus and $1 billion of revolving facility. In relation to that as well, you have kept open the opportunity of doing buybacks in the future. What kind of timescale should we be considering in terms of that? How long we should wait before you may come back to that?
On the scale, I think we want to reserve the right to be highly flexible. The operating rule is to do what makes sense for our investors and make sure this is something where we can stand in front of this room and feel good about what was done. I wouldn't want to speculate on the size of the transaction because we just don't know, depending on the opportunity. I think we'll try quite hard to do something at the end of the day which makes a difference to the bottom line. Does that answer the question? No?
Okay. In terms of the timing before you think about a share buyback again?
Very difficult, again, to predict. I think we'll keep it under review, as we say, and update with earnings as we go.
It's not that hard to kind of figure out how we think about it, right? Everything we look at, we have a burden of proof to our board to basically say, do we buy? Do we buy back shares? Do we pay a special dividend? Every single time. Okay. We will never do an acquisition where it is better for us to buy back shares. Okay? If it's better to buy back shares, we'll buy back shares. Okay. We are super disciplined. I want to be very clear about this.
Thank you. Sorry, two very quick follow-up questions.
I said that not putting myself up.
No, no. On other things. With AHL, it's the number 1 bullet point in your 2016 objectives on distribution is to market AHL's strategies, given their strong three-year performance. Given what you said to Arnaud about the capacity in Dimension, should we think about this, which strategies should we think about there? The second question, just on the GLG ELS compensation. Can you just confirm that is normal competitive practice in the industry and we shouldn't expect any change? Thanks.
Yeah. Take the second one and take the first one.
I mean, on ELS, the other point I would make is that there is a scale of payout in the industry, which are generally much higher than we are. There are many, many good reasons why people want to work at GLG. There are many cultural reasons, the way they run money, the freedom and flexibility they're given. As a result, our payouts aren't as high as other people's, and we feel like we're at the most economic place we can be.
AHL.
I think on AHL, we have different things we can do. The main AHL Alpha and AHL Diversified have a lot of capacity. Obviously, we think we will raise money in those, and it's what we're spending a lot of time. I think one of the interesting things we're spending time on is have customized mandates, where we go to a very large institution and offer a blend of various products. Some trend following, some Numeric, some equity quant on the long only side, and essentially give the opportunity to the client to decide how to allocate between the various pockets. I think this is a new trend we're seeing in the U.S., and it's actually quite exciting. Once again, think of the quant business as one unit.
We've tried very hard to diversify the business away from trend following and build a suite of products where we can go from a holistic standpoint and say, "This is the type of portfolio of quant strategies we can put together and build them for you." Some things at some point in time won't be attractive. Like, we have a Tail Protect product, which essentially gets you long volatility. Well, last year it wasn't great. This year it looks better. You can mix and match the various products and design a portfolio to suit a profile of liability and a profile of risk preference. When you put this in conjunction with what we're doing with alternative beta, it is quite an exciting opportunity.
It's a matter of whether we will get a fair share of the wallet size in terms of growing the business, and the pool could be in the plenty.
Thanks. Morning, it's Tom Mills from Credit Suisse. I think that EBA put out a paper back in December, an advisory paper, saying that they thought bonus caps should apply to asset managers. They looked like it wouldn't be the case earlier. Do you have a view on how that might emerge?
I'll make the point that over the last three or four years, there have been various compensation schemes mooted. The impact of those to date has been minimal on our business. There's been a fair amount of compliance work that had to go around it, nothing that's fundamentally altered the way that we compensate people. Certainly nothing that's put us at a competitive disadvantage. It's extremely difficult to predict where any of this stuff ends up, so far so good.
Good morning. Thank you. It's Chris Turner from Goldman Sachs. Two questions if I may. The first is, I think I spotted a number saying that three quarters of your AUM is institutional, I guess mirroring a trend, a shift in the industry more broadly. Is there anything you think you can do or the industry can do to reawaken retail investor interest in these products? Any particular products they might be interested in, number one. Then number two, I think I heard you say, Manny, that you'd hired some people to do EM equity, long only, some EM debt products and some other areas. Is that something you're doing because the M&A prices have been expensive and therefore you might do less of if you do more M&A, or is it independent of what happens on the M&A side?
I think there's two things. Every morning we wake up and we say, "How can we hire the best people and grow the company organically?" That has to be what drives the business because it is the cheapest thing to do. Yes, there is some risk, and yes, it takes some time to get to scale. When we hired Guillermo, he was managing a very, very significant amount of money at HSBC. We sort of think about it and say, "What's the water size? What can we do? How do we attract the clients, and does it make sense? Do we like the asset class? Do we think we make money in EM debt?" The answer is yes, yes, and yes.
There is some risk, we sort of understand the parameters, we incredibly focus on making sure we succeed, the exact same thing with Rory, the exact same thing with the equity team, the exact same thing with Henry Dixon. In terms of where that leads us, we look at acquisition and we say there are certain things where it's going to be hard to get to scale because we just don't do them. In this situation, providing that it makes sense from an acquisition standpoint and from a shareholder value standpoint, we will look at them. If the price is right, we will do them. Do the things that we just couldn't do by hiring people.
Let me take an absolutely random example, please do not read anything into what I'm saying, let's say we wanted to build a mezz business, a mezz loan business. In this day and age, it is very hard to hire two people who have invested into mezz from Goldman Sachs picking Goldman Sachs because Goldman has a mezz fund, the question comes from Goldman Sachs, try to raise a mezz fund with two ex-Goldman Sachs people. They are people who have existing business, who are doing well, who are raising money. This just doesn't work anymore. You need to buy businesses. In terms of retail, there is nothing wrong about retail. It is very attractive. My friend, Rick Ellis, who's here today, spent plenty of time in Japan to try to revigorate the Japanese retail business.
We're spending a lot of time in Australia in retail. AHL retail is quite an attractive business. There's a whole effort right now to focus on retail. The only problem is it's like animal spirit. It's a little bit hard to predict when people are excited or not. You look at the actual performance, they're quite good year to date. It feels a hell of a lot better to be invested in AHL than it feels to be invested into most other asset class. Does it mean that return will come back? Who knows. In a rational world, they should. Whether they will, we really don't know. We'll spend a lot of time collectively as a management group to try to make sure it happens, because it's not lost on us the margins are very good.
Hi, good morning. It's Peter Lenarcic from RBC. A few questions, please. First of all, Jonathan, you said there's been no change in your regulatory capital requirements to date. I was just curious if you were expecting such a change. The second question would be on net flows. They accelerated throughout 2015. Has that been a complete reversal so far in 2016, based on market conditions? The third would be for you, Manny. You indicated that GLG average weighted performance over the past three years was 3.1%. Is that GLG alternatives only or including?
On the reg cap side, I think the FCA is pretty backed up in terms of what they're going through. We've just been told no change, that you know as much as we do at this point. On the net flows acceleration, we have made this point continually about the lumpiness of our business. I wouldn't read anything particularly into the H1, H2 split, in terms of momentum or otherwise. It'll shock you to know I won't make any comments on 2016. Manny, answer your question on GLG.
I think also, if you weren't there and you were still on vacation, the first week of January, when the market in China dropped 7% for no reason, that's very good. We were shocked. In a way, there's an unpredictability about what happened in January, which took us all by surprise. I think everyone in this room can agree on one thing, is that the brutality of what happened in the first four weeks in January was just absolutely crazy. Part of our comment is also tainted by what we saw as pretty extraordinary markets. I can name you the five stocks which are the worst performer in the S&P 500. You won't be surprised, they've all done more than 50% year to date, and they're all in oil and gas. The pain out there is pretty high in some of the sectors.
Hi. Good morning. It's Gurjit Kambo, JPMorgan. Just in terms of Brexit, certainly, what operational challenges do you see for the group? Is there any sort of contingency plans you are looking at?
No particular contingency plans. We have about GBP 13 billion of funds domiciled in the EU, about GBP 8.5 billion of which is in Ireland, and the balance in Luxembourg. Whether or not Brexit happens, we'll still have those funds.
Hi. Paul McGinnis from Shore Capital. Just to return to that ELS variable compensation point. If I've understood the math correctly, we kind of end up in a slightly perverse situation whereby shareholders would have been better off had the performance been worse in those funds. Is there any appetite within either yourselves or wider industry to actually address the remuneration structure such.
On the alternative, and on the long only side, and on the quant side, is very important. We see this as one of the benefit of being a large alternative players. It's very important, and when you think of creating value for shareholders, having it on the line, that's in our view, really key in terms of driving a business forward. Anyone else on the phone? Anything else? We're going to stick around if anyone has any other question, please feel free to come. Thank you for coming.