Size matters, sometimes?

A recent (January 2014) research paper published by The University of Chicago entitled "Scale and Skill in Active Management" analysed the nature of returns vs scale in active mutual fund managers. Whilst the study focused on US mutual funds the findings were seemingly both worrying and logical, particularly from an investor's point of view.

The study found strong evidence of decreasing returns at the industry level - in other words as the size of the mutual fund industry increases, a fund's ability to outperform a passive benchmark declines. At the same time the skill (and we would assume advances in technology) levels have improved, but this has coincided with the industry growth, thereby cancelling out the benefits of the improved skills from boosting fund performance. The study also found that performance deteriorates over a fund's lifetime, which could also be explained by the decreased ability to outperform by the industry as a whole.

The full report, which covers 51 pages, can be found here, focusses on the mutual fund industry - in other words long only funds trying to achieve relative outperformance of the underlying benchmark, rather than an absolute return. In essence it seems to be saying that as the industry gets so large, and information, technology and skill become so readily available, the opportunity to outperform diminishes. In simpler terms the whole market is in danger of becoming a huge "crowded" trade.

In the absolute return space there have been a variety of studies over the years that indicate early stage managers outperform, as do those with limited funds under management. However in an Australian context this has not always been the case, partly because there aren't many Australian funds which are genuinely large by global standards. In addition the Australian absolute return sector is not homogenous, as shown by the wide ranging returns from both early stage and developed managers, small and large and across and within strategies.

There's no doubt that being in the correct asset class, or having the right strategy to suit the prevailing market significantly affects performance, but the one factor which dominates performance over time is skill. In absolute return investing skill can be found in managers with both and small large FUM, even if the opportunity set decreases as FUM increases.

Over the last 12 months 90% of Australian funds provided positive returns, with an average return of 12.19%, outperforming the ASX200 at 10.98%. But those averages mean little when the range of individual fund performances are considered - the best returning 73%, and the worst -54%. Even those statistics mean little given the volatility of some fund's returns, with less than 20 with at least a six year track record providing positive returns every year.

Size doesn't matter. Skill does

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Pengana Australian Equities Fund recorded -2.00% during January but still a positive 10.45% for the previous 12 month period.

The Auscap Long Short Australian Equities Fund recorded 1.32% during January, a weak month for domestic equity (-3.03% ASX 200 Acc) and 52.73% during the previous twelve months.

Totus Alpha Fund returned -0.59% during January, and 57.2% for the previous twelve months with a volatility of 16.9% and Sharpe ratio of 2.65.

The Allard Investment Fund returned -1.1% during January, a good outcome in difficult Asian markets which fell 3.3% (MSCI Pacific ex Japan A$).

FUND REVIEWS RELEASED THIS WEEK:

Optimal Australia Absolute Trust The Fund has a track record of just over 5 years which incorporating the market conditions that have been both varied and challenging. To date the Fund has significantly outperformed the underlying market since inception, particularly given the high market volatility in 2008 & 2011.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, an irreverent look at Quantitative Easing.

On that note, I hope you have a happy and safe weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

For more information visit www.cpresearch.org.au or contact me by email.

There's been widespread comment in both the mainstream and industry media over the past couple of weeks about the proposed changes to FoFA, particularly relating to conflicted remuneration (a.k.a. commissions) and financial advisers' fiduciary obligations (a.k.a. acting in the client's best interests).  Without wishing to enter into the debate in too much detail we would have thought both were only aimed at a small minority of financial advisors, with the vast majority complying irrespective of any legal obligations.

As with many such things it is always the actions of the minority that lead to the creation of laws, rules and regulations, as generally common sense and sound ethics prevail. In the case of financial services when a product issuer has to offer significant incentives, such as a commission of over 5% to an advisor, to gain support for their product it is pretty safe to assume there's a catch, and its the investor who's caught. Think Trio's Astarra for example.

As a result the whole industry ends up with a significant ongoing regulatory burden, and as at present, more change and potential uncertainty. To be fair the government's stated objectives of the current changes to FoFA are to reduce compliance and the regulatory overhead, but one aspect which does help the consumer is simple and clear transparency. Generally speaking disclosure over fees and costs is now transparent, even if not always easy to fully understand. Similar disclosure over an advisor's potential conflicts, commissions and parent ownership would not go astray.

Meanwhile regulatory changes around licencing and custody of assets are also in the wind, both of which will increase compliance costs for fund managers, and hopefully towards the end of 2014 we will see the outcome of the David Murray chaired inquiry into financial services, which is almost guaranteed to change the regulatory landscape further.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Monash Absolute Investment Fund returned 0.80% for January, a strong performance against the Index (-3.03%) and 26.7% for the latest 12 months.

The Pengana Australian Equities Market Neutral Fund returned -2.5% during January, a weak month for local equities which fell -3.03%, and 12.52% for the previous 12 months.

The Paragon Fund focusses on core competencies in the resource and industrial sectors. The Fund deploys a high conviction, long bias strategy, focusing on proprietary, fact based research. The fund returned -1.1% for January and 14.10% over the previous six months. It has recorded a Sharpe ratio of 2.00 since inception and strong up and down capture ratios of 0.70 and -0.18 respectively

FUND REVIEWS RELEASED THIS WEEK:

Bennelong Kardinia's Absolute Return Fund returned -2.12% in January 2014, taking returns for the year to 9.91%, with annualised returns since inception of 13.62%.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

On that note, I hope you have a happy and safe weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

If you believe, like us, that something must be done about this, please sign the pledge and share with your friends today. Your name will help us raise awareness for more CP research funding. Thank you! For more information visit www.cpresearch.org.au or contact me by email.

What a difference a year makes! If you're getting older (like me) another year under the belt - sometimes literally - doesn't change much except to add a fraction more experience, a couple of kilo's move downwards from the chest, while on the negative side one subtracts a few grey cells.

If you're at the other end of the scale, and just arrived into the world like young Molly, the latest addition to the extended Gosselin "Brady bunch", then a year makes a massive difference, as she grows, and goes, from crawling to walking. OK, so she might not be reading this, but I'm sure you get the picture.

To most investors however an extra year falls between the two, depending on what year it is, or was, and where on the timeline of life one sits.

I was reminded of this during the week by Sean Webster, AFM's Head of Research, who had put together some tables and charts of one, five and ten year returns for a range of absolute return and hedge fund strategies, comparing them against the ASX200. In addition to the wide diversity of returns of each strategy from year to year, the headline statistics looked pretty impressive, and from the perspective of the annualised returns of the funds and the ASX, reasonably consistent.

For the record to December 2013 the annualised returns of each were as follows:

Over ten years the ASX200 Accumulation index returned 9.63%, while hedge funds returned 10.95%.

Over five years the ASX200 returned 12.45%, while hedge funds returned 12.57%.

Not bad, and pretty consistent as mentioned earlier, except for the range of returns by individual sector or strategy which varied dramatically.

Add in one year though to take in 2008, and what a difference a year makes:

Over six years the ASX200 returned 1.72% per annum, while hedge funds returned 5.91%

If there was one consistent statistic over all three time frames it was their respective levels of risk, with hedge funds running at half the volatility of the underlying market which ranged from 13.21% (five years), 13.53% (over ten years), to 15.79% (over six years), compared with 6.90%, 7.80% and 8.75% from hedge funds.

Whichever the time frame, the ASX200's volatility was invariably higher than its return.

And on that sobering note..

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Morphic's Global Opportunities Fund primarily consists of Global listed shares, and will generally have at least 50% of its net assets invested in same. The fund returned 34.52% for the previous twelve months.

The Optimal Australia Absolute Trust returned 0.57% during January, a weak month for domestic equities, and 1.60% for the last twelve months with a volatility of 1.83%. Since inception in September 2008 the annualised return is 10.34%.

Bennelong Kardinia's Absolute Return Fund is an Australian domiciled equity long/short fund investing in ASX listed securities. The fund has returned 9.91% over the previous twelve months.

The Aurora Fortitude Absolute Return Fund returned 0.32% during January and 8.12% for the previous 12 months with a very low volatility of 1.39% (S&P ASX 200 Accum 11.54%).

Insync's Global Titans Fund investment strategy is driven by fundamentals combined with active risk management. The fund returned 23.33% over the last year with a Sharpe ratio of 2.47.

FUND REVIEWS RELEASED THIS WEEK:

BlackRock's Multi Opportunity Fund current strategy has returned 8.85% pa since inception (July 2004), annualised volatility of 4.14% and 13.88% and only three negative months since May 2010.

FUTURE EVENTS

21 February 2014 in Sydney: AIMA's Hedge Fund Regulatory Update provides an update on Hedge Fund regulations including the Investment Manager Regime; ASIC Regulatory Guides 166 and 133 plus more. No charge to attendees.

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, I would simply like to wish my beautiful wife a Happy Valentines Day. As they say, "happy wife, happy life".

On that note, I hope you have a happy and safe weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

If you believe, like us, that something must be done about this, please sign the pledge and share with your friends today. Your name will help us raise awareness for more CP research funding. Thank you! For more information visit www.cpresearch.org.au or contact me by email.

This week's round table forum organised by the Hedge Fund Association was well attended by a diverse range of fund managers and service providers, although probably less well by investors. A number of speakers gave interesting and relevant presentations, with the overall theme seeming to be standards around hedge fund reporting, structure, fees and transparency, with a particular emphasis on traps in store for the unwary investor.

Much of the forum centered around the UK based, and Northern hemisphere focussed Hedge Fund Standards Board, (HFSB) and the Open Protocol risk aggregation and reporting initiatives (previously known as OPERA). Both the HFSB standards and OPERA seem eminently logical and sensible, although understandably orientated towards the requirements or desires of institutional investors, and as a result the larger funds in which they generally invest.

However the relevance and thrust of both are entirely appropriate and applicable to the Australian absolute return and hedge fund sector, even if by and large most local managers and funds would broadly comply with the main thrusts of the HFSB, perhaps with some greater transparency around fund expenses. Meanwhile if fund managers are serious about attracting inflows from large institutional investors, either at home or abroad, they will in due course have little option but to adopt the reporting transparency of Open Protocol.

Australia's regulatory systems ensure retail investors in hedge funds are pretty well informed, even if ASIC's requirements appear broader than those detailed in HFSB's Standards, which run to 37 pages. Of course there have been a few well, and some not so well, publicised lapses in standards from some managers. However there is only so much the regulator can do before the event, so it would seem to be up to the collective power of investors to take over. As this is easier said than done, service providers, platforms, asset consultants and research houses should take the initiative.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Pengana Asia Special Events (onshore) Fund returned 1.22% over December and 11.55% for the previous twelve months. The Fund's strategy has seen a very volatility of 2.31% as compared to 11.43% (S&P/ASX 200 Acc) for CY2013.

The Cor Capital Fund returned -0.22% during December and 1.69% for the calendar year with a low volatility of 6.83%.

Bennelong Long Short Equity Fund returned -2.32% during January, a difficult market both globally and in Australia, with the twelve month return at 19.07%.

FUND REVIEWS RELEASED THIS WEEK:

AFM's updated Fund Review for Optimal Australia's Absolute Trust December 2013 has been released. The fund is characterised by very low risk with an annualised standard deviation of 3.60% and a Sharpe Ratio since inception of 1.73.

Morphic's Global Opportunities Fund returned 3.85% in December and 42.49% for the previous twelve months with a volatility of 9.10% p.a.

The Aurora Fortitude Absolute Return Fund is characterised by steady returns and very low risk. Since inception (March 2005) the Fund has returned 8.16% pa.

FUTURE EVENTS

NEXT WEEK on Wednesday 12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney. Now in it's 17th year, this is Australia's largest annual event for custody, funds management administration, and technology.

21 February 2014 in Sydney: AIMA's Hedge Fund Regulatory Update provides an update on Hedge Fund regulations including the Investment Manager Regime; ASIC Regulatory Guides 166 and 133 plus more. No charge to attendees.

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, if you need something to do in Sydney, why not have a look at the Chinese New Year Festival Programme, there are still plenty of events going on this weekend to celebrate Chinese New Year.

On that note, I hope you have a happy and safe weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

One month into 2014, and one day into the Chinese Year of the Horse, and volatility is back with a vengeance. Not being an expert in such things as lunar cycles, and not believing too much in tea leaves or horoscopes to determine our futures I won't try to draw any conclusions between the two. What is clearly apparent is that markets and investors knew US tapering would have to start eventually, and with the first round occurring in December the next one would be sooner rather than later.

One old market adage is that they (markets) don't repeat themselves, but they do tend to rhyme. When readily foreseen or well telegraphed events finally occur, how come the markets react after, rather than leading up to the tipping point? A primary cause of this must be the psychology of many participants not changing over the decades, or down the centuries. For all the advanced technology available to investors, or maybe in part because of it, markets continue to rhyme.

So volatility has spiked, with emerging markets and currencies being particularly hard hit. No reasonable investor should be surprised given a number of well-known managers and market commentators have been saying for the last few months that the 20% returns from the ASX for each of the past two years would be a hard act to follow in 2014.

Risk will becoming a driving force once more, and with some exceptions, absolute return and hedge fund managers will once again prove their worth as being more adept at avoiding unpleasant surprises. For the record the average equity based fund in AFM's database has matched or bettered the annualised performance of the ASX200 accumulation index over the past one (20%), five (12.5%) and 10 years (9.6%) but with half or less the market's volatility.

The challenge, as always is knowing which are the exceptions, and which are exceptional.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Auscap's Long Short Australian Equities Fund delivered 2.57% during December and, taking full advantage of buoyant equity markets, returned 51.86% for the year.

The Pengana Australian Equities Market Neutral Fund returned 3.6% during December and 19.11% for the year to December 2013, a sound performance given it's correlation of -0.03 and neutral market exposure.

Allard's Investment Fund had a flat December and returned 11.64% for the previous twelve months with a low standard deviation of 6.99%, in line with its conservative investment philosophy.

FUND REVIEWS RELEASED THIS WEEK:

AFM's updated Fund Review for Insync Global Titans Fund for December 2013 shows the Fund delivering an annualised return of 11.41% and annualised standard deviation of 8.50% (since inception in October 2009) with sound risk-reward statistics.

Bennelong's Long Short Equity Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, with a ten year track record and annualised net returns of over 20%.

FUTURE EVENTS

Last days to register for the HFA Sydney Institutional Investor Roundtable  on 5 February 2014: This event is a roundtable discussion with refreshments provided. It is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues. Held at the KPMG offices in Sydney, this is a FREE event, all welcome.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different to celebrate the Super Bowl this weekend, here is one of the cute commercials newly released for the occasion, and another that's just plain funny (and gross).

On that note, I hope you have a happy and safe weekend and Happy Chinese New Year (Kung Hei Fat Choi) as we move forward into the year of the Horse.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

It is generally accepted that the bigger a fund becomes, the greater the inflows it receives. That might sound pretty obvious the other way around (in other words, the larger the inflows, the larger it becomes) but the reality was confirmed this week with figures produced by HFR in their Global Hedge Fund Industry Report.

Amongst the numbers showing the industry FUM as a whole now totals US$2.63 trillion, the concentration of inflows by fund size was significant according to  HFR numbers. For the full year to December 2013, investors allocated $40 billion to firms with greater than $5 billion, $16.6 billion to firms with between $1 billion and $5 billion in AUM, and $7.2 billion to firms with less than $1 billion in AUM.

Given the relatively fewer numbers of large funds with $5 billion or more under management, this left the high number of smaller firms, (although $1 billion is significant by Australian standards) fighting over the smallest piece of the pie. What is interesting is that the weighted average return of the HFR Index was only 9.2% for the year, a pretty underwhelming result given the S&P500 gained around 30%.

While not privy to all HFR's data, what is clear is that Australian managers, both large and small, generally performed well above their global peers in 2013, with an average return across all strategies of 15%, and with equity based funds returning over 20%. To be fair these averages were not weighted by FUM, but given the returns of two of the largest managers in AFM's database, Platinum and Magellan, both with over $15 billion, returning an average of 42%, the weighted result would be even higher.

Both Platinum and Magellan invest offshore, so would no doubt receive some benefit from the falling $A, but nonetheless both provided excellent returns.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Pengana Australian Equities Fund returned 1.27% during December with a month-end cash balance of 22%. Annual return was 18.60% (S&P/ASX 200 Accum 20.12%) with a volatility of 7.82% (Index 11.43%).

The Optimal Australia Absolute Trust returned 0.54% during December ending the month with a net exposure position of 11.1%.

Aurora Fortitude Absolute Return Fund returned 0.74% during December and 7.57% for the last 12 months with a volatility of 1.58% and only one month of negative returns. The Fund also recorded positive returns for the four months the equity market was negative over the last year.

The Totus Alpha Fund returned -0.39% during December and 60.19% for the year to December. Top contributors to performance over the month were long positions in Australian index futures +1.72%, Japanese index futures +1.6% and a short in Transfield Services +0.75% (mining services).

Intelligent Investor Value Fund returned 0.38% during December and 44.21% over the last twelve months with a set of very strong risk statistics, notably a Sharpe ratio of 3.36.

FUND REVIEWS RELEASED THIS WEEK:

The Bennelong Kardinia Absolute Return Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with a seven year track record. The Fund returned 1.11% in December 2013, taking returns for the year to 14.78%, broadly in line with annualised returns since inception in May 2006 of 14.10%. By month-end the Manager had increased the Fund's net exposure to 74.8%, 82.5% long and 7.7% short.

FUTURE EVENTS

5 February 2014: HFA Sydney Institutional Investor Roundtable - Complimentary roundtable discussion with refresments provided. This is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues.

The Hedge Fund Standards Board is a standard setting body for the global hedge fund industry, which brings together investors and managers from around the world to promote high standards of practice in the industry. It is custodian of the Hedge Fund Standards which: (a) provide a mechanism for promoting transparency, integrity and governance; (b) facilitate investor due diligence; (c) help safeguard the reputation of the industry; (d) complement public policy.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, Sam Kekovich, Lambassador for Australia encouraging us to throw a bit of lamb on the barbie this weekend.  For the benefit of our overseas recipients, Monday 27 January is an Australia wide public holiday and we will be taking advantage of a relaxing 3 day weekend.

On that note, I hope you have a happy and safe Australia Day long weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Bernie Madoff, the fraudster who ripped $65 billion off investors over a 20 year period, and who in spite of not actually being a hedge fund did nothing to help the industry's reputation, reportedly has advanced kidney cancer, and recently suffered a heart attack. It seems he might not get to serve out his full 150 year sentence.

Meanwhile Shawn Richard, the only person jailed over the Trio Capital/Astarra fraud (which was a hedge fund) was reportedly released from goal this week after serving his minimum two and a half year sentence. At the same time financial adviser Ross Tarrant, who was banned by ASIC for seven years for recommending his clients invest in Richard's fraud (and presumably benefited from the significant commissions on offer) has lodged a submission with the Federal Court to appeal the AAT's upholding of his ASIC ban order.

Welcome back, with somewhat belated Happy New Year wishes. AFM and "Hedge Clippings" took the opportunity for a figurative re-charge of the batteries, which in my case consisted of the traditional over-indulgence, and resultant side effects, to the tune of about 5kgs on the scales. I tried to convince myself that the scales themselves might have their own battery problem, but sadly not. 

So back to the grindstone, armed with the same resolutions (as one of my children not so kindly noted) I made 12 months ago. The 5/2 diet, (it works for me anyway) more laps of the local pool, and lower the alcohol consumption.  There's even a plan to go the whole month of February without touching a drop, but as I have found in the past, even the best laid plans can go astray!

One task I did achieve over the break was to attack my overloaded email inbox, which regularly receives 150 to 200 or more messages a day, and needless to say I consistently fail to clear. I came across a program called SaneBox which promised to sort regularly read and important messages from the irregular, or unimportant ones. With some trepidation I tried it.

After advising me it might take some time to sort through the 156,783 emails I had or hadn't previously read and actioned, it completed the task in less than half an hour, and it would appear to date, very successfully.  Don't ask me how it works, but here's a link to more information.

Of course when it comes to assigning Hedge Clippings to "Important" or "Later", you will have to make your own decision!

Now getting back to reality, taking a look back at fund performances for December and 2013 as a whole, and a look forward to what might be in store in 2014.

Although only about half of December's results are to hand, returns are looking as if the industry finished the year on a sound note, up 1.5% for the month, and taking full year returns to 15.58%. Comparative performances for the ASX200 Accumulation Index were +0.79% and +20.12%, although equity based funds outperformed with returns of +1.70% and +21.24%  respectively. 

From a strategy perspective Equity 130/30 outshone all others, albeit with only a relatively small sample size, returning 37.56% in 2013, followed by Equity Long at 25.61% and Equity Long/Short at 20.44%, and Equity Income on 19.96%. At the other end of the scale Currency/FX funds lost 4.93% on average, and Commodity/CTA's 2.75% to round off a disappointing year. Full details are available here.

Individual fund performances ranged from +90% down to -55%, with just under 30% of funds outperforming the ASX200 Accumulation's +20.12% over the year, and 87% delivering positive returns.

One interesting statistic is that the ASX200, while enjoying a sound year, significantly underperformed other developed markets and in particular the S&P500 accumulation return of 32%. However, when reviewing overseas and global hedge fund returns and databases, it would appear that average fund returns in 2013 were less than 10%, significantly underperforming the market. One can speculate on the reason, but it might be the broader range of strategies employed overseas, particularly in the non-equity space of credit and bond funds, which suffered compared to their equity counterparts.

AFM's full analysis of the Australian Absolute Return and Hedge Fund sector will be available once all fund's December returns have been received later this month. If you like to receive a copy please send us an email.

Looking forward, the general view of managers we have spoken to is a more subdued return from markets than in 2013, but with higher volatility, which has been the recent trend based on December's market (down over 4% at one stage before recovering in the Christmas rally) and month to date in January. The A$ appears to have further downside potential, having fallen 16% since it highs last year, and Australia's economy is likely to see headwinds, while the US recovery gradually takes place.

Overseas, and globally, tapering will stay firmly on the agenda, but with Janet Yellen due to take the reins from Ben Bernanke at the end of this month, the questions will be at what pace, and to what degree will she change direction. Politicians and policy, here in Australia and overseas will no doubt continue to take centre stage and therefore the controls; China may or may not avoid a hard or soft landing; and the Middle East will sadly continue to hit turbulence.

Looking back 12 months to January 2013 nothing much seems to have changed except some of the names and faces of the players.  

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Bennelong Kardinia Absolute Return Fund returned 1.11% in December 2013, taking returns for the year to 14.78%, broadly in line with the Fund's annualised return since inception of 14.10%. The Fund's December performance was achieved in a market which although positive lagged most of its global developed market peers, and which at one stage was down over 4% on concerns over the US tapering of asset purchases. By month end the Manager had increased the Fund's net exposure to 74.8%, based on 82.5% long, and 7.7% short.

The Monash Absolute Investment Fund returned -0.60% during December 2013 bringing the 12 month return to 30.41% as compared to the S&P/ASX 200 Accum return of 20.12% with a lower volatility of 8.55% as compared to 11.43% for the Index. The Fund's month-end exposures were 83% net and gross 86%. The Manager discusses a number of portfolio holdings including Royal Mail, Greencross and Silver Chef.

Morphic Global Opportunities Fund returned 3.85% during December as the Fund benefited from $A weakness, holdings in US stocks as well as a short position on US bonds and other currencies. Full year performance was 42.49%, in line with the Fund's benchmark. The Fund closed the year fully invested, but with a significant overweight to developed markets, led by Japan, and a large underweight in emerging markets.

The Bennelong Long Short Equity Fund returned 2.68% during December bringing twelve month performance to 22.46%. The Fund now has 11 years of unbroken positive returns. Annualised performance since inception in January 2003 is 20.94% with the Fund's maximum drawdown 12.22%. Comparative ASX 200 Acc figures are 10.08% and 47.19%.

Insync Global Titans Fund returned 4.9% in December ahead of the MSCI All Country Index in $A at 4.0% with the Fund recording an up capture ratio of 0.45 and down capture ratio of -1.17 over the last 12 months.  The Fund's Sharpe ratio of 3.18 is notable as is the maximum drawdown on 2.54%, also over the last 12 months. The Fund has no foreign exchange hedging in place and benefitted from the 2.1% depreciation of the Australian dollar against the US dollar in December.

FUTURE EVENTS

5 February 2014: HFA Sydney Institutional Investor Roundtable - Complimentary roundtable discussion with refresments provided. This is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues.

The Hedge Fund Standards Board is a standard setting body for the global hedge fund industry, which brings together investors and managers from around the world to promote high standards of practice in the industry. It is custodian of the Hedge Fund Standards which: (a) provide a mechanism for promoting transparency, integrity and governance; (b) facilitate investor due diligence; (c) help safeguard the reputation of the industry; (d) complement public policy.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, Clark the talking dog expresses his disappointment on missing out on some tasty treats.

On that note, I hope you have a happy and safe weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

AFM will be closed for the Christmas break from Monday 23 December 2013 and will re-open on Monday 13 January 2014. Our website and database will continue to be updated during this time.

If you have any urgent requirements, please call 02 8007 6611 and leave a message, or send us an email.

We hope that you have a wonderful Christmas and if you are going away, a safe and happy holiday. Here are the AFM Christmas elves with a little bit of song and dance.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Buy the rumour, Sell the fact - or in the case of the reaction to the FED's announcement of the start of the tapering process, Sell the rumour, Buy the fact has never seemed more accurate, even if it does turn out to be a one day rally. The taper news probably overshadowed the decision, or indication, that interest rates would stay close to zero for longer, but in any event US investors and the market should break for Christmas with a reasonably positive outlook heading into 2014.

Having enjoyed a solid 2013 I would expect they'll be reasonably pleased about the year just past, unless they were long resources, and gold in particular. Looking at the average returns of funds in AFM's database as an example, although only to the end of November, equity based funds are up 19.19% year to date, neck and neck with the ASX200 accumulation index which gained 19.18% over the same period. Non-equity funds have struggled meanwhile, rising only 4.06% YTD to the end of November.

Meanwhile on the regulatory front, Australia's new government probably hasn't had the best press since its election in September. Today's announcement by the Assistant Treasurer, Senator Sinodinis of significant amendments (aka watering down) of the Future of Financial Advice (FOFA) legislation is likely to receive mixed reactions. The proposed changes will undoubtedly reduce the cost and inconvenience to the industry created by the original FOFA, but various measures designed to protect, or inform investors and consumers would seem to have been significantly reduced in the process.

As a result the reaction will no doubt depend on which side of the desk you happen to be sitting. Or as former PM Paul Keating once famously quoted: "In the race of life, always back self-interest, at least you know it's trying."

This will be the last edition of "Hedge Clippings" for 2013 as we head to the sand and the surf to work off the excess intake that is likely to take place next week, past performance in this case being a very reliable guide to future consumption. We'll be back bigger (as usual) and hopefully better than ever, with some exciting developments in store for investors and fund managers alike.

In the meantime thank you for your readership and interest over the past year, and wishing you a wonderful Christmas, and a safe, healthy and prosperous New Year.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Optimal Australia Absolute Trust returned -0.52% during November bringing the twelve month performance to 1.61% and annualised returns since inception (Sept 2008) to 10.45% p.a. with a volatility of 3.62% p.a. The Fund's net risk exposure was 4.0% while gross exposure was 67.2%. Long investments returned -0.58% while short investments returned 0.04%.

The Aurora Fortitude Absolute Return Fund continues to deliver low risk returns recording 0.52% during November and 6.80% for the last 12 months with a volatility of 1.67%. The Fund has a Sharpe ratio of 2.33 and a maximum draw-down of 0.19% over the last twelve months as compared to the S&P/ASX 200 Accumulation Index draw-down of 6.72%.

Bennelong's Long Short Equity Fund returned -1.80% during November and 20.32% for the previous twelve months with a below market volatility of 9.36% p.a. (S&P/ASX 200 Accumulation Index 11.51%). The Fund's long-term performance remains strong with a since inception (Jan 2003) annual return of 20.82% as compared to the Index of 10.08% p.a. with a slightly below Index volatility. The Fund's maximum draw-down is notable at -12.22% as compared to the Index value of -47.19% as is the Fund's Sharpe ratio at 1.25 as compared to 0.43 (Index).

The Cor Capital Fund returned -0.90% during November, a weak month for equity markets which returned -1.31% (S&P/ASX 200 Accumulation Index). The Manager comments 'During November the Fund's cash holdings made the largest positive contribution to performance (+0.08%) with equities (-0.26%) and precious metals (-0.64%) making negative contributions to the overall return.'

FUND REVIEWS updated this week include:

Morphic's Global Opportunities Fund is a global equity long/short manager with a long bias and a macro-economic overlay. The mandate allows the Fund to short sell, use derivatives and invest in assets such as commodities & currencies as Fund's philosophy is that only Managers with flexible investment and hedging strategies will be able to deliver acceptable, steady, real, absolute returns over the investment cycle.

FUTURE EVENTS

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

We hope that you have a wonderful Christmas and if you are going away, a safe and happy holiday. Here are the AFM Christmas elves with a little bit of song and dance:

On that note, Merry Christmas and we will see you again in the new year!

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.