UPDATE 1-Man Group buys into specialist fund firm Nephila

(Rewrites throughout)

By Laurence Fletcher

LONDON, June 6 (Reuters) - Man Group (EMG.L), the world's largest listed hedge fund firm, has agreed to pay $50 million in cash for a 25 percent stake in Nephila Capital, a fund firm that focuses on insurance instruments such as weather derivatives. The investment, which follows Man's purchase of 50 percent of credit specialist Ore Hill in March, comes as the increasingly competitive hedge fund industry hunts for sources of extra return not correlated with traditional markets.

Bermuda-based Nephila, which manages around $2.4 billion in assets and employs 25 staff, specialises in insurance-based instruments such as insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives, Man said in a statement on Friday.

The minority stake will be part of Man ECO, the firm's multi-strategy private equity manager which specialises in environmental finance.

The investment will be funded from Man's existing resources. Last week Man Group chief executive Peter Clarke told Reuters it would use some of its $1.5 billion surplus cash to acquire stakes in other fund managers, along the lines of its Ore Hill deal, and was looking to invest in an Asian-based management firm as well as an equity-focused manager.

"This transaction further develops Man's strategy to expand the range of opportunities for our investors. The natural catastrophe and weather derivative markets offer significant opportunities for uncorrelated alternative investment returns," Clarke said on Friday.

Landsbanki analyst Ian Poulter said in a note on Friday that he rates Man a buy.

"The group continues to deliver strong and uncorrelated returns, something that we expect will enable Man to benefit from any fall-out due to the challenges currently facing many hedge funds," he said. (Editing by Louise Ireland)