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* Takes in net $2 bln for third straight quarter
* Boosted by sales of $6.5 bln, highest for three years
* Marred by $700 mln loss on investments amid market flux
* Shares down 1.9 pct in volatile trade (Adds detail, analyst reaction, updates shares)
By Simon Jessop
LONDON, May 9 (Reuters) - British hedge fund manager Man Group voiced a note of caution over its full-year outlook on Friday in spite of its strongest quarterly sales for three years in a "challenging" period for the industry.
Though recent progress suggests Man Group is emerging from a broad restructuring to reduce dependence on the computer-driven AHL fund that took a heavy battering from the fallout from the 2008 financial crisis, it remains at the mercy of market volatility from factors including the continuing geopolitical tensions in Ukraine and Russia.
The company, founded in 1783 as a barrel maker, said it took in a net $2 billion of new money during the first quarter, mostly into GLG alternatives, part of its long-short equities business, after posting sales of $6.5 billion.
That partially compensated for money withdrawn by investors from its FRM operation, which runs funds of hedge funds and offers advisory services to institutional clients. It recorded a net $700 million performance loss across its investments, which analysts at Barclays said was broadly in line.
As a result, funds under management rose $900 million in the quarter to $55 billion, at the upper end of analyst expectations but still a far cry from the total of about $75 million in 2008.
Analysts at Barclays described the $2 billion in net new money as a positive surprise after inflows of $700 million in the previous two quarters, but pointed out that the figure was "flattered" by two large mandates.
Though Man chalked up a third straight quarter of net inflows, a feat last achieved in the second quarter of 2008, investor sentiment was dampened by the continuing potential for weak investment performance.
By 1201 GMT the group's shares, up 17 percent in the year to date, were down 1.9 percent in volatile trade, against a fall of 0.4 percent for the mid-cap FTSE 250 index.
"The market environment in the first quarter has been particularly challenging and March was a very difficult month for the industry. In this context, performance across the firm was reasonable on a relative basis," Chief Executive Manny Roman said in a statement.
"Whilst we are pleased to have recorded a solid quarter of net inflows, we remain cautious in our outlook for asset flows for the rest of the year given recent mixed absolute investment performance."
That mirrors the view of rival asset managers such as Schroders after a quarter marked by the start of the Ukraine crisis at the end of February.
Financial markets were hit hard by the knock-on effects of Russia's annexation of Crimea as well as persistent concern over growth in China and the impact of a further tightening in U.S. monetary policy, though CEO Roman did not specify which of the various market risks he was most concerned about.
Man said performance in its GLG alternative strategies business, which covers bets on a range of assets including shares, bonds and derivatives, was flat overall.
The majority of GLG's long-only strategies, which are not involved in borrowing assets as part of a bet on a market fall, had negative investment performance, however. Most of the $500 million hit was attributable to a 5.9 percent fall at its Japan CoreAlpha fund.
Performance in Man's Europe-based FRM alternatives division, which runs the largest managed account platform in the world, was positive, increasing funds under management by $100 million.
The company also gained $300 million from the weakening of the US dollar against the the Japanese Yen during the period. (Editing by David Goodman)