Man Group warned shareholders on Thursday that it would garner smaller management fees this year as institutional clients continued to defect in the wake of the Madoff affair.

The world's biggest listed hedge fund manager revealed that funds under management had sunk by a further $2.6 billion (£1.6 billion) to $44 billion in the eight weeks since its financial year-end. Strong net new sales to private investors were not enough to offset the impact of redemptions by institutional investors — mostly pension funds and insurance companies.

In the latest eight weeks, institutions pulled a net $3.6 billion from the group while wealthy individuals put in a net $1.8 billion. The other $1 billion of the reduction in funds under management was because of negative investment performance.

Peter Clarke, chief executive, said the Madoff affair — Man lost $360 million of client money to the swindler — had dented its reputation but it was impossible to say for what proportion of mandate losses it was to blame. “Clearly it's been unhelpful.”

But he was confident the flood of client losses would ease in the current quarter as investors become unhappy with the rock-bottom returns in other asset classes, such as cash and government bonds, and return to hedge funds. Clients have to give notice to withdraw funds, giving Man good visibility on future redemptions.

Profits for the year to March dived by 40 per cent to $1.2 billion, as the group indicated in a trading statement two months ago. Funds under management slid by $900 million to $46.8 billion in the year as the group struggled with poor investment performance.

But it demonstrated its confidence in the future by holding the total dividend at 44 cents, which is up 23 per cent in sterling terms.

During the year private investors put in a net $2.2 billion, but there were net outflows of $4.3 billion from institutional investors.

Mr Clarke said that Man had not been immune to the “extraordinary turmoil” in financial markets last year and had cut its costs accordingly, with cost reductions running at an annualised $60 million. The industry was now showing “signs of stabilisation”, he said.

Man produced disappointing investment returns for investors in its flagship RMF Four Seasons strategy, losing 15.6 per cent of their capital in the year. Clients of Glenwood, another big strategy, lost 16.7 per cent.

Man shares fell 17¼p, or 6.9 per cent, to 232¾p.

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